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Unsurprisingly, bank profits headed lower in Q2 of this year, largely due to banks preparing provisions for future losses. Deposits and investment banking revenues have also weakened across the financial sector. Lending, however, appears to be quite healthy with demand for credit holding strong and delinquencies remaining extremely low.

That doesn’t tell the entire story, however, as rising rates and borrowing costs threaten to weather consumers’ ability to service their debt. Moreover, credit score inflation leftover from pandemic relief efforts in 2020-2021 may have temporarily inhibited banks’ ability to efficiently budget the risk of their loan books. A persistently flat yield curve could also present issues for the profitability of lending going forward.

Related ETFs: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE)

Per FDIC data, cited by Reuters, US banks reported $64.4 billion in profits in the second quarter of 2022, down 8.5% from a year ago, driven primarily by larger banks boosting their provision expenses for potential losses. Additionally, PYMNTS reports deposits at US banks were down $370 billion in the second quarter. That’s not a significant loss, considering total deposits are still worth more than $19.5 trillion, but it was the first time that deposits declined since 2018.

Additionally, investment banking revenues are on the decline. Per MarketWatch, Dealogic reports that the top 10 investment banks on Wall Street booked $56.4 billion in revenue in 2022 as of September 14, down nearly 39% from $92 billion in 2021 as of the same date, and about 8% lower than 2020’s tally of $61.3 billion.

These factors suggest banks may have to rely more heavily on their lending and credit businesses, which have remained particularly healthy in the face of rising rates across the economy. To keep up, JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co are each raising their prime lending rates to the highest levels since the global financial crisis of 2008, following the latest rate hike from the US Federal Reserve.

Though rates have moved higher and increased the costs of borrowing, they are yet to meaningfully impact borrowers’ credibility as delinquencies remain low across most classes of loans. The FDIC reports that the rate of noncurrent loans…

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