LONDON, May 15 (Reuters Breakingviews): Among banking's top jobs, treasurer might be one of the least glamorous, and the most obscure. Executives like Citigroup's Andrei Magasiner, Bank of America's Shannon Lilly and JPMorgan's Charles Bristow get far less attention than colleagues who run major business lines. But their role in managing a bank's exposure to interest rates has become singularly important.
Their work shows through in the sharply different ways in which big lenders' earnings have grown in response to changing monetary conditions, including the fastest rise in US interest rates in history. The difficulty for investors is that it's not always obvious exactly how treasurers are doing their jobs, and what it means for the share price.
Treasurers sit in the engine room of a bank. Their job includes making sure an institution has all the liquidity, capital and debt funding it needs, in the most cost-effective way possible. The job's most prominent duty in recent years, however, has been to manage interest-rate risk, which stems from the fact that a bank's assets and liabilities behave differently as the cost of money changes.
It can be existential. Silicon Valley Bank failed last March because its balance sheet was laden with low-yielding bonds that had fallen in value as rates rose. That left an unfillable hole when SVB had to sell bonds at a loss to pay back fleeing depositors. Arguably a treasurer's core job is to make sure that doesn't happen. They'll typically collate all the interest-rate risks embedded in the business divisions and hedge them centrally, using derivatives or security portfolios to make sure that the bank as a whole isn't too sensitive to future rate movements one way or another.
This matters to investors in major lenders because a treasurer's actions can influence earnings. Consider the growth in net interest income for the big US consumer banks over the past two years - a period in which the Federal Reserve raised rates from roughly zero to more than 5 per cent. The range of outcomes is huge, suggesting that the banks' treasurers managed interest-rate risk in very different ways. JPMorgan's net revenue from lending and borrowing, for example, rose by about two-thirds between the first quarters of 2022 and 2024, while Bank of America's increased by just a fifth.
There's an even sharper difference over the past 12 months. JPMorgan's net interest income jumped by about 5 per cent year-on-year in the first three months of 2024, excluding its acquisition of First Republic, another failed US lender. Citi and Bank of America's moved relatively little, while Wells Fargo (WFC.N), opens new tab and US Bancorp's figures were down 8 per cent and 14 per cent respectively. Some smaller lenders like KeyCorp and Comerica saw annual declines of a fifth.
The numbers have lots of moving parts, like acquisitions, lending decisions and depositor behaviour. Business models differ too: JPMorgan and Citi are much bigger in credit cards, for example, than Wells Fargo and US Bancorp. A meaningful part of the dispersion, however, probably comes down to hedging decisions taken in previous years. For example, Oppenheimer analyst Chris Kotowski reckons some of the lower-growth lenders bought protection in the form of interest-rate swaps against rate cuts at the end of 2022, when a 2023 recession and more dovish Fed seemed likely. Those hedges would have turned out to be unnecessary when rates rose, denting revenue growth for the banks that bought them.
Meanwhile, Bank of America boss Brian Moynihan is still laboring under the lender's pandemic-era decision to load up on securities like mortgage bonds at a time when JPMorgan, under Jamie Dimon, decided to stockpile cash instead. The result is that Moynihan got stuck with a pool of relatively low-yielding securities while Dimon was able to invest its cash at higher rates more recently. Wells Fargo analysts reckon that, as a result, Bank of America's revenue this year will be about 10 per cent lower than it would have otherwise been. Such decisions typically include the CEO and Chief Financial Officer, often with the board's input. Treasurers are often a key voice, however, and are generally responsible for implementing them.
The upshot for investors is that bank treasuries can at times resemble profit centres more than pure risk-management divisions. But their contribution is hard to predict. Granted, investors could see that Bank of America had gorged on long-dated mortgage bonds, but it wasn't necessarily obvious that would create an opportunity cost that weighed on earnings. It's hard to tell from the outside where the line lies between hedging that offsets movements elsewhere on the balance sheet, and market calls.
Banks boil down the complexity by giving investors the fully netted-off view of their interest-rate exposure, via tables showing how earnings might change when interest rates move. These disclosures, however, are a blunt instrument. Bank of America's sensitivity table consistently showed a much larger upside than JPMorgan's to a 1-percentage-point instantaneous rate rise across all maturities. In fact, Dimon's bank posted much better top-line growth as rate hikes materialised.
The problem is that treasurers have to make numerous assumptions about customer behaviour and other hard-to-model factors when producing those estimates.
From the second quarter of 2022 to the first quarter of 2023, for example, JPMorgan's disclosures suggested that its US dollar net interest income would fall by around $2 billion if rates suddenly rose by 1 percentage point. That changed to a greater than $2 billion increase after the bank changed some assumptions about the speed of deposit repricing. Investors are in the dark until a lender's CEO or CFO offers explicit guidance for net interest income.
None of this uncertainty helps the case for investing in banks, which tend to trade with a lower price-earnings multiple than the wider stock market. Some lenders have tried to give investors more help, like Barclays, whose treasurer Daniel Fairclough last November held, opens new tab a "teach-in" on his hedging programme. The bank said in its first-quarter investor presentation, opens new tab that it had locked in 4 billion pounds ($5 billion) of hedge income for 2024 already, and even guides the market on how big it thinks its big book of derivative hedges will be in future years.
Yet there's still a fairly wide spread of analyst forecasts for Barclays' net interest income between 2024 and 2026. The very fact the bank decided to school investors on its balance sheet management suggests they struggle to get their heads around it all. If that's the case for the relatively transparent UK players, it's even more challenging for investors in the bigger and more complex US giants. Treasurers might be out of sight, but they are far from being out of mind.
