If rate hikes are over, what happens to bank earnings?


As the U.S. Federal Reserve (Fed) increased interest rates, banks' net interest margins expanded along with bank earnings. But now that the Fed appears to be done raising interest rates, what happens to banks' profitability? As Lisa Welch, portfolio manager of John Hancock Regional Bank Fund, explains, bank earnings may continue to grow and profitability can remain high due to rising loan volumes. 

Banks get the majority of their revenue from the lending business, or net interest income. Net interest income is very steady for the banking industry. In fact, it has only declined on an annual basis five times in the last 84 years. Because net interest income is driven by loan volume and rate, a rising volume with flat rates continues to imply rising income.

Loan growth for the industry is almost always positive and should be a reflection of economic growth. For the next few years, Lisa and her team expect 3% to 5% industry loan growth based on about 2% GDP growth plus 2% inflation.

Learn more about John Hancock Regional Bank Fund and the themes driving the team's investment strategy.