JPMorgan Chase, the largest bank in the United States, saw its shares drop by 5% after the bank’s president, Daniel Pinto, expressed concerns about overly optimistic expectations for net interest income (NII) and expenses in 2025. While the bank expects to meet its target for NII in 2024, Pinto believes that the current estimate for next year is not reasonable due to anticipated interest rate cuts by the Federal Reserve.
Pinto stated that he believes the estimate of around $90 billion for NII in 2025 will be lower, although he did not provide a specific figure. This news led to a decline of over 7% in JPMorgan’s shares, the worst decline since June 2020. Investors are becoming increasingly cautious about the outlook for JPMorgan, a bellwether banking stock, and are also concerned about the broader slowdown in the U.S. economy.
NII is a key source of revenue for banks and is derived from the difference between the cost of deposits and the interest earned from lending or investing. As interest rates decline, new loans and bonds purchased by the bank will yield less, impacting NII. While falling rates may slow the outflow of funds from checking accounts into higher-yielding instruments like CDs or money market funds, they also reduce the yield on new assets, creating a complex situation for banks.
Pinto acknowledged that lower rates would reduce the pressure to reprice deposits, but he also mentioned that JPMorgan is “quite asset sensitive.” This means that the bank’s earnings are significantly impacted by changes in interest rates.
In addition to concerns about NII, Pinto expressed skepticism about analyst estimates for expenses in 2025. The current estimate of approximately $94 billion is considered too optimistic due to factors such as inflation and new investments being made by the bank. Pinto suggested that expenses may be higher than expected.
When it comes to trading, JPMorgan expects third-quarter revenue to remain flat or increase by about 2% compared to the previous year. However, investment banking fees are expected to see a significant jump of 15%. This aligns with Goldman Sachs’ announcement that trading revenue for the quarter is projected to decline by 10% due to a challenging comparison to the previous year and difficult trading conditions in August.
Overall, JPMorgan’s share price decline and Pinto’s cautionary statements reflect the growing concerns among investors about the future profitability of the banking sector and the broader economic outlook. The impact of declining interest rates on NII, coupled with potential inflation and increased expenses, creates uncertainty for JPMorgan and other banks. Investors will closely monitor future developments to assess the potential risks and rewards of investing in the banking industry.
