A long-awaited Federal Reserve interest rate hike appears to be days away, but bank executives are not getting the confetti ready.
On Tuesday top executives from some of the country's biggest banks offered mostly lukewarm forecasts for next year, ranging from a slight improvement from 2015 to more of the same.
Higher rates will be the biggest boost to revenue in 2016, but that fact is a problem. The effect will be pretty small, and real revenue growth will have to wait until the economy starts growing faster, said Marianne Lake, the chief financial officer of JPMorgan Chase.
"If I'm realistic in 2016, the single biggest thing that is going to drive earnings growth is going to be the rate environment," she said. JPMorgan's revenue should improve long term, "but, in 2016, I think you are aware that there are headwinds," Lake said.
Speaking at a conference in New York, executives from JPMorgan, Wells Fargo, PNC Financial Services Group, BB&T, SunTrust Banks and KeyCorp all expressed near certainty that the Federal Reserve's Open Market Committee would raise rates when it meets next week.
But they also agreed that the immediate effect would be limited, and the factors that have caused earnings to be muted so far in 2015 would remain, including market volatility, global unrest, energy concerns, low consumer spending and setbacks in credit improvement.
Lake predicted continued "moderate growth" in the U.S. and "more of the same generally, [but] a little bit more constructive" internationally, with recent emerging-market crises petering out.
Bill Demchak, the chief executive of PNC, said the expected 25-basis-point increase in the Fed funds rate would immediately add about $85 million to his company's bottom line, but it won't be a panacea for the broader economy.
"Maybe there will be a confidence boost, but I don't see the direct link to" improved demand, he said.
Demchak's outlook for the U.S. economy "isn't wildly different than what we had this year," meaning he expects modest growth and an improving consumer outlook.
However, he raised concerns about the corporate sector, particularly corporate leverage, which is "as high today as it was back in 2007." There's also been a "lack of investment in long-term growth, as opposed to M&A and share buyback. And I think eventually that's going to make its way through to our balance sheets in a bad way," Demchak said.
Wells Fargo Chief Executive John Stumpf said that, hike or no hike — and he's expecting one — the real problem is that low consumer confidence is suppressing demand, leading to a dearth of attractive investments for banks. Both consumers and small businesses could easily add more debt if they wanted to, but a lack of confidence is holding them back from investing, he said.
"There's still a big lack of earnings assets that are properly priced for the risk," he said.
The bank chiefs were also in agreement that the industry has reached the bottom of the credit cycle, and while they don't see a spike in problems coming, the unusually low loss rates cannot continue forever. That should also modestly dampen next year's results.
"Provisioning for us and the industry has been a tailwind, and it's going be a headwind," said Bill Rogers, CEO of SunTrust. "I don't see anything in our credit portfolio that's a warning sign, but the relative improvement will abate."
BB&T CEO Kelly King was perhaps the most optimistic about how higher interest rates would affect the real economy. They would be "overall very stimulative" by giving savers more money to spend, he said.
King, like the other bank executives, dismissed the idea that higher rates would reduce loan demand, saying that the increase being considered is too small to affect decisions like buying a home or investing in one's business. "Rates don't drive the decision to borrow or not borrow," he said.
A key question raised Tuesday is how rates would affect demand for deposits. Most agreed that it would gradually increase competition, though deposit rates would increase more slowly than the Fed rate, and so a good part of the new revenue should be straight profit.
"A lot of the rate increase will flow to the bottom line, that will be good for BB&T and good for the industry," King said.
But how rates will affect deposit gathering is unknown, Stumpf said. Unlike in previous Fed tightening cycles, banks are flush with cash and attractive investments are few. Therefore, it's unlikely that the immediate competition for rates will be intense.
"The biggest challenge I have every day when I get up is not growing deposits; it's growing earning assets," Stumpf said.
So if rates do move, "we will see a very tepid response" in terms of deposit pricing, he said. A 25- or 50-basis-point increase "is just not enough to matter."
And if banks decide to start trying to aggressively gather deposits, Stumpf said, "I don't know what the liquidity will be used for — what assets will you be chasing?"