JPMorgan Chase & Co.'s forecast for 2019 net interest income improved modestly from its most recent guidance, reflecting a rebound in 10-year yields and translating into a projected baseline for the fourth quarter that the bank hopes it can continue to build on with balance sheet growth.
The company had forecast net interest income of about $57 billion for the year in early September, shortly after the yield on 10-year Treasurys dipped below 1.5%. The 10-year yield had recovered to 1.76% by Oct. 11.
The net interest income projection of somewhat lower than $57.5 billion that the bank gave in its third-quarter earnings report brought it back into line with its guidance in July, which was contingent in part on the number of Federal Reserve rate cuts.
Since the guidance in early September, "we've seen the 10-year a bit higher and we've seen some growth in balances," CFO Jennifer Piepszak said on a conference call with reporters.
In the third quarter, JPMorgan Chase's net interest income fell 1.2% from the second quarter to $14.23 billion, and its net interest margin compressed 8 basis points to 2.41%.
Still, the forecast for 2019, which implies net interest income in the fourth quarter of about $14 billion, is "not a bad place to start," Piepszak said in a separate conference call with analysts, with portfolio mix and growth potentially delivering boosts.
Piepszak said the bank's growth outlook is heavily dependent on deposit flows, and that as falling rates diminish the competitive position of banks that offer high-yield accounts, JPMorgan Chase could benefit.
"In terms of balance sheet growth in 2020, you can think about [it] largely in deposits," she said. "The rate environment and the economy will matter a whole lot. But just in a declining rate environment, the higher-yielding alternatives for consumers are less attractive. And so we do expect to continue to grow the franchise, and we could see healthy growth in the deposit base."
JPMorgan Chase reported that its cost of interest-bearing deposits declined 3 basis points from the second quarter to 0.85%. But Piepszak said the bank's deposit costs overall are still being impacted by a mix shift into interest-bearing accounts.
"We have come off the peaks in terms of [certificate of deposit] pricing, but you still have slight migration there into interest-bearing products," she said.
Piepszak reiterated guidance that she has given previously that since deposit costs increased modestly when rates were rising, there is limited room to reduce them on the way down.
"Broadly speaking, we say betas are symmetric," Piepszak said, referring to the relationship between deposit costs and underlying market interest rates.
On the retail side, there has been little movement, she added. "Wholesale, there's obviously more opportunity to reprice, but we do that client by client, and we're not going to lose valuable client relationships over a few ticks of beta."