Interest rates: For American banks, Powell matters more than Putin

As investors wait to see what effect global sanctions will have on the Russian economy and major US banks, they’d probably be better off watching Federal Reserve Chairman Jerome Powell, not Russian leader Vladimir Putin. to try to understand what happens next.
Big U.S. banks have some exposure to the Russian economy — but only about $15 billion, according to data from the Bank for International Settlements and the Wells Fargo Investment Institute. That’s less than 0.1% of the total assets of the US banking system.

Worries over Russia-linked loans are therefore unlikely to give Powell pause on rising interest rates at next week’s Fed meeting. After all, there doesn’t seem to be any risk of a Russian contagion spreading to the US banking system.

Italian, French and Austrian financial companies have more exposure to Russia than to the United States – and their banking systems are not as large as those of the United States, so their risk from Russia is higher. It’s a key reason why shares of UniCredit in Italy and Societe Generale in France have each fallen more than 35% in the past month.

Banks in Germany, the Netherlands and Switzerland – which also have smaller economies than the United States – all also have relatively high exposure to Russia, according to data from the BIS and Wells.

So investors in big US banks might breathe a little easier knowing that exposure to Russia is low – and that the Russian-Ukrainian conflict is unlikely to alter the Fed’s plans to gradually raise interest rates. interest.

Banks will make more money from loans as rates rise, and Powell made that clear in his congressional testimony. ILast week, he backed a quarter-point rate hike at the Fed’s next meeting on March 15. Traders are now pricing in a near 100% chance that the Fed will do just that, and then continue raising rates throughout the year.
These heightened expectations of higher rates have pushed long-term bond yields — and bank stocks — higher. the Selected Financial Sector SPDR Funds (XLF) climbed more than 4% on Wednesday. This exchange-traded fund has JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (VS), Morgan Stanley (MRS) and Goldman Sachs (GS) among its main holdings.
Of them AND F (IAT) who own small regional banks (KRE)who are making even more money from mortgages and other consumer loans, also surged on Wednesday.

What US banks fear

There is a potential dark cloud on the horizon, but it has nothing to do with Russia. Some worry that banks face a rocky road if soaring oil prices help create a dreaded stagflation scenario: the combination of an economic slowdown due to runaway inflation.

“Rising energy prices, rising commodity prices and the prospect of slowing economic growth due to lower spending put the Fed in a tough spot,” said Gerald Sparrow, managing director. investments at Sparrow Capital Management, in a recent note to clients. “The inflationary impact of these factors could be substantial.”

If the Fed is forced to raise rates more aggressively than currently expected to curb inflation, it could eventually push interest rates to levels that would be punitive for consumers and businesses looking to borrow money.

In other words, any benefit banks would derive from higher rates increasing loan profits could be more than offset by the grim reality that demand for loans would likely dry up.

“The Fed has to deal with inflation. Banks are currently overvalued at this point,” said David Wagner, portfolio manager at Aptus Capital Advisors. “They’re facing a perfect storm of slowing economic growth and declining profits.”

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