JPMorgan Chase & Co. (JPM), U.S. Bancorp (USB): Higher Rates Mean Higher Returns for These Banks

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Increased volatility and higher interest rates have caused headaches for many banking companies. However, that is not the case for JPMorgan Chase & Co. (NYSE:JPM), despite its woes. I believe these banks will benefit from the prevailing interest rate environment. Let’s see how.

JPMorgan Chase & Co (NYSE:JPM)

Higher yields mean additional returns

The banking industry is highly reliant on interest rates as a source of income. However, banks have little control over the interest rates. The speculation around the unwinding of the third round of easing has increased interest rate volatility, and the markets have started to price in the effects of the Fed’s exit already.

As a result, 10-year Treasury yields have surged 34 bps since the start of this quarter. While it should be a concern for some banks as the value of their assets might fall, this is good news for JPMorgan Chase & Co. (NYSE:JPM). CEO and Chairman Jamie Dimon said in the financial conference hosted by Morgan Stanley that the bank is prepared for a rise in rates. Dimon added that if the yield on the 10-year Treasury moves up by 100 bps, JPMorgan Chase & Co. (NYSE:JPM) will make an additional $2 billion. The bank could make as much as $5 billion if the yield surges by 300 bps. Therefore, JPMorgan Chase & Co. (NYSE:JPM)’s investors should keep a close eye on the 10-year Treasury yield as it could be a key indicator of the bank’s profitability this quarter.

This is very much similar to what Wells Fargo & Co (NYSE:WFC) CEO said a week ago. Bloomberg reported that Wells Fargo & Co (NYSE:WFC) is positioned to benefit from higher interest rates. That’s because it has constructed its portfolio in a way where its interest bearing liabilities are more sensitive to changes in interest rates than the bank’s interest earning assets. As a result, the value of the bank’s interest bearing liabilities falls faster than the value of its interest yielding assets when the rates increase. This causes the bank to benefit from higher rates. However, Wells Fargo & Co (NYSE:WFC)’s CFO stopped short of giving estimated figures for this anticipated benefit.

Higher mortgage rates mean additional mortgage banking revenue

U.S. Bancorp (NYSE:USB), which is already the third largest home lender in the US, sees higher revenues accruing from its mortgage banking unit despite a hike in mortgage rates during the second quarter. The 30-year fixed mortgage has climbed 37 bps since the beginning of the current year.
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