Saber Capital: Interest Rate Fears And The Dreaded Yield Curve

Here is a chart of net interest income in the US banking system in dollar terms over the past 37 years since rates peaked in 1982:

net interest income

The net interest income (not the margin, but the aggregate profit) in the banking system has grown in 35 of the last 37 years, and just about every single year since 1934 when record keeping began.

I’ve mentioned before how predictable the deposit growth in the US banking system is (total deposits have risen every single year since the late 1940’s, without a single down year). Aggregate deposits grow each year, regardless of whether the economy is growing or in recession. With this steady dose of new funds, bank assets climb in lockstep, and so too does their ability to earn a profit on the spread of this greater supply of capital.

To sum this point up, profit margins (NIMs) will go up and down, but overall profit continues has risen each year since 1934 when the government began tracking this data. Regardless of whether rates and NIMs are rising or falling, banks have continually made more money over time. If you believe that our economy will be larger in 5 or 10 years, then it’s a near certainty that banking profits will be larger along with it.

And since Wells Fargo owns roughly a tenth of this banking system and given the sticky predictable nature of the banking business, I think it’s highly likely they’ll grab their piece of this incremental deposit growth.

I hope your summer is going well, and I look forward to writing again soon. Please feel free to reach out should you have any questions/comments.

Best Regards,

John Huber

Managing Partner, Portfolio Manager

Saber Capital Management, LLC

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