Don’t Overstate AI’s Threat to Bank Profits

All year, AI enthusiasm has had an evil twin: fear for industries AI will allegedly disrupt. This spring, those fears hit software-as-a-service stocks—the “SAAS-pocalypse.” Then they bounced and the world moved on. Now there is a new target: Banks. Global Banks fell into a mini-correction since mid-August, and many see AI as the culprit. Supposedly, normal folks will soon use AI agents to move their savings to the highest-yielding option. Painless and profitable for people, bad for banks—eroding their cheap funding base. Sounds like SAAS-pocalypse 2.0 to us, and it ignores Bank stocks’ robust fundamentals.

We can sort of see why visions of AI doom are stalking banks. Moving a bank account is a pain. There is the initial paperwork. The hassle of transferring money. The paperwork to move your direct deposit. The scramble to update every bill you auto-pay.

In the 1980s and before, society was used to changing banks. You probably had to do it every time you moved to a different state. It was a hassle, but you did the initial paperwork and you were done, no direct debits to update. But then regulations changed. Banks consolidated and went national. When you moved, you could keep your bank account. No more switching from Texas Bank of Banking to California Bankety Bank when you moved west! (Or vice-versa.) So we all got comfy. Then we set up direct deposits, saving us all the biweekly trip to deposit paychecks, and we got comfier. Autopay’s advent made the inertia complete. Many economists theorize this leads people to leave deposits at banks paying far below prevailing rates to avoid the annoyance of changing everything. So the thought of an AI agent to endure that hassle for you has certain appeal. It sounds like the inertia antidote.

Maybe in the very long run. But stocks don’t discount the long run now. They pre-price the next 3 – 30 months. In that timeframe, mass AI-led account switching looks far-fetched. Where AI enthusiasts see utopia, banks see cybersecurity risks. JPMorgan Chase CEO Jamie Dimon said plainly on this week’s earnings call that his institution is blocking outside agents from accessing customer accounts for that reason. These institutions are highly regulated. They have privacy policies governing third-party data access. We suspect granting access to Tech tools whose creators can’t stop talking about their security risks these days isn’t likely to come fast.

Cybersecurity is also a concern for individual users. Think about how you log into your bank online: username and password. Everything you put into a chatbot gets exposed. That includes your login credentials. And if you were to let an agent into your account, it would include your balance, transaction history and reams of other private personal information. Plus, if the worst happens and your funds are stolen through whichever agent you used, who is liable? What is your recourse?

Perhaps one day banks and Tech firms will solve these security issues. Maybe they will figure out liability. Maybe consumer protections will evolve and include agentic risks. But these things take years of regulatory hearings and legislation. Then it can take years to implement the changes as banks overhaul their systems and compliance practices to get ready. It is all well outside the 3 – 30 months markets price.

So forget long-term pipedreams and narrow your focus to expected earnings over that window. They look bright, with the rock-solid Q3 earnings announced thus far looking like a down payment on more to come. One reason is trading revenues, which were strong once again. Another? The yield curve steepened a lot this year. Yes, the Fed hiked recently. But long-term US Treasury rates rose more this year. People fear this, sweating debt crises and expensive private loans. But for banks, rising long rates raise loan revenues. So when long rates rise more than short rates, it means the gap between their funding costs and loan rates widens. Bigger profits! Or in bankspeak, bigger “net interest margins.” Note, too, Fed surveys show high rates aren’t whacking loan demand. Businesses are eager to borrow, and banks are eager to help them out.

This is what we think markets should start fathoming as sentiment moves on from today’s fears. When that will happen is unknowable. Short-term volatility is unpredictable at the market, sector, industry and company level. But patience through the wobbles tends to be validated over time when fundamentals are strong, as we think they look today.