U.S. Banks' Financial Trends and Interest Income

U.S. Banks' Financial Trends and Interest Income

U.S. banks' interest income has doubled since the start of the QE (Quantitative Easing) tightening ($298 billion in 3Q 2023 vs. $139 billion in 2Q 2021) and is up 57% year-to-date through 2019.

Interest Income Growth

Of that $298 billion, more than $208 billion is from domestic and international loans, with domestic loans (issued by banks inside the U.S.) totaling $199 billion vs. $144 billion a year ago, $112 billion in 3Q 2021, and $135 billion at the peak in 2019, meaning the burden on borrowers has grown nearly 1.5 times since 2019.

The rest of the interest expense is from borrowing from the Fed, interbank lending, interest rate derivatives, securities, etc.

How sensitive is a 1.5x increase in debt service costs over 4 years? On an annualized basis, the burden on the economy has grown by $260 billion, and it continues to grow rapidly, with about 80% being borne by U.S. residents - that's less than 1% of GDP. It's reasonable but not yet critical, given the accumulated safety margin from 2009 to 2022. Therefore, the reaction in the form of rising delinquencies has not yet occurred, but it is yet to come.

Interest expenses increased 14 times (!) from $9 billion to $124 billion per quarter - the highest interest expenses ever, as the previous high was in 2008 at $97 billion per quarter. The funding base is gradually becoming more expensive, with deposits accounting for about 80% of the interest expense.

Net Interest Income

Faster growth in interest income is allowing margins to hold, and as a result, banks' net interest income at the peak ($175 billion per quarter), although down from the peak ($180 billion) in Q4 2022, is markedly above the $135 - $140 billion it was in 2018 - 2019.

Price-to-Earnings (PE) Ratio

PE (Price-to-Earnings ratio) net of credit loss provision expense is at a peak of $155 billion, up from $125 billion in 2018 - 2019.

Non-interest income declined to $74 billion for the quarter vs. $86 billion at the peak in 1Q 2023 and $66 billion in 2018 - 2019, mainly due to lower trading and investment income, while transaction and account fees remain flat.

Net income is $68 billion vs. $59 billion in 2018 - 2019, but net income is the last thing to look at in bank reports.

Conclusion

In conclusion, U.S. banks are experiencing significant changes in their financial landscape, with a notable increase in interest income driven by loans. While borrowers are facing a growing burden, the overall impact on the economy is manageable thanks to past safety measures. Despite rising interest expenses, banks are maintaining healthy margins and seeing improvements in their Price-to-Earnings ratio. Net income is showing resilience and growth in the face of evolving challenges.

Table of contents
  1. Interest Income Growth
  2. Net Interest Income
  3. Price-to-Earnings (PE) Ratio
  4. Conclusion