Banks Brace for Higher Interest Rates as Profit Impact Is Unclear

Are rising interest rates good for banks? Executives at some of the world’s largest lenders are trying to reassure investors that the answer is yes. Higher returns on new investments, increased profit margins on loans, and improved earnings from bond trading, they say, will offset any losses they suffer on existing bond holdings. (The value of bonds falls as rates rise.) Rising bond yields are “very healthy,” said Anshu Jain, Deutsche Bank’s co-chief executive officer, at a June 4 investor conference in New York.

It may not work out that way. Rates are rising in part because investors are speculating that the Federal Reserve will slow its $85 billion-a-month bond-buying program—not because the economy is about to take off. Banks could face losses on the bonds they own without gaining opportunities to make more money on loans and investments. “Higher rates without meaningful economic growth are bad for banks,” says Paul Miller, an analyst at FBR Capital Markets. “A lot of these banks have put on big securities portfolios at very low rates, trying to put their money to work. If rates move up materially, those things will be marked down.”