- Major US banks begin reporting third-quarter results on Tuesday as Treasury yields climb to multidecade highs, raising questions about lending demand, deposit costs and the financial pressure facing households and businesses.
The latest bank earnings season will provide an early indication of how higher borrowing costs are affecting the US economy. JPMorgan Chase & Co. (NYSE: JPM), The Goldman Sachs Group Inc. (NYSE: GS), Citigroup Inc. (NYSE: C) and Wells Fargo & Co. (NYSE: WFC) are scheduled to report on October 13, followed by Bank of America Corp. (NYSE: BAC) and Morgan Stanley (NYSE: MS) on October 14.
Investors are looking beyond headline profits to assess whether rising Treasury yields are beginning to weigh on loan growth and capital markets activity. The Reuters earnings preview said analysts expect third-quarter earnings at the largest banks to rise by as much as 20% from a year earlier, supported by trading and investment banking revenue.
However, bank shares have weakened as bond yields have climbed. The KBW Bank Index fell 13% from its August peak close and declined 6% in the third quarter, Reuters reported.
The results could help investors determine whether higher interest rates are primarily supporting bank income or increasingly constraining the customers who borrow from those institutions.
Rising Treasury Yields Create a Two-Sided Test for Banks
Higher interest rates can benefit banks when they earn more on loans and securities than they pay depositors. That difference, known as net interest income, is a major source of revenue for traditional lenders.
But the benefit is not automatic. Banks may have to pay more to retain deposits as customers seek better returns, while existing loans and securities can respond differently to changing rates. Higher funding costs can reduce the benefit of charging more for new lending.
The pressure also extends beyond bank balance sheets. Treasury yields influence borrowing costs across the economy, including corporate financing and some consumer loans. The 10-year Treasury yield recently reached levels not seen since 2002, while the average 30-year fixed mortgage rate climbed to 7.49% for the week ended October 2, its highest level in nearly three years.
Higher mortgage rates can reduce home affordability and discourage refinancing. Businesses facing more expensive financing may delay expansion or postpone borrowing, while consumers may become more cautious about financing cars and other large purchases.
The relationship between Treasury yields and borrowing costs is not identical for every product. Fixed-rate loans may be priced against longer-term market rates, while variable-rate loans can respond more directly to changes in benchmark rates. Borrower creditworthiness, lender competition and loan terms also influence the final rate.
Investors will therefore watch banks' comments on loan growth, deposit pricing and credit quality. Executives' assessments of consumer spending and business demand could help show whether the higher cost of credit is beginning to change borrowing behavior.
The bond market's influence on financial stocks is also important for equity investors. Rising Treasury yields can pressure dividend stocks and growth shares by making bonds more competitive and increasing the discount rate used to value future earnings. Bank shares face additional questions because higher yields can affect both their revenue and the health of their borrowers.
What Investors Will Watch in Tuesday's Bank Earnings
The first area of focus will be net interest income and management guidance. Investors want to know whether banks are earning enough on loans and interest-bearing assets to offset higher deposit costs. Any change in full-year forecasts could influence expectations for future profitability.
Loan growth will be another key indicator. Strong lending would suggest that businesses and households continue to seek credit despite higher rates. Slower growth could indicate that borrowing costs or economic uncertainty are discouraging some customers from taking on debt.
Credit quality will provide a separate measure of financial strain. Investors will examine provisions for potential loan losses, delinquency trends and management commentary on consumers and corporate borrowers. Higher rates do not automatically produce a deterioration in credit, but borrowers with limited financial flexibility may become more vulnerable if costs remain elevated.
Capital markets revenue will also matter, particularly for banks with large trading and investment banking operations. Market volatility can create trading opportunities, while uncertainty and expensive financing can delay mergers, acquisitions and other transactions. The balance between those effects may help explain differences in results across lenders.
The bank earnings preview for five stocks to watch outlines the major lenders reporting this week and the factors investors are monitoring. Tuesday's reports from JPMorgan, Goldman Sachs, Citigroup and Wells Fargo will provide the first major read-through, with Bank of America and Morgan Stanley adding further detail on Wednesday.
The broader economic picture will remain important. Upcoming inflation and retail sales data could help investors judge whether price pressures and consumer demand are keeping interest rates elevated. Stronger-than-expected inflation could reinforce concerns about borrowing costs, while weaker demand could raise questions about future loan growth.
For now, higher Treasury yields are creating risks for borrowers without necessarily signaling an immediate decline in bank earnings. The third-quarter results should clarify whether lenders are still benefiting from interest income and active trading, or whether funding costs and slower credit demand are beginning to offset those gains.