Major US banks said on Friday higher interest rates boosted profits even though the economy was slowing and consumers showed signs of more cautious behavior.
JPMorgan, Wells Fargo and Citigroup’s earnings indicated higher U.S. Federal Reserve interest rates had allowed them to charge more on loans while raising rates on deposits more slowly. Consumers were starting to deplete savings, the banks said, and Citibank and Wells Fargo noted that losses on credit cards and other debts were starting to rise.
The Fed’s aggressive monetary policy has made it more expensive for consumers and businesses to borrow and repay debt, while banks are slowing the flow of credit and beefing up cash levels after Silicon Valley Bank and two other lenders collapsed earlier this year.
Citigroup CEO Jane Fraser said she was seeing a continued deceleration in spending, indicating “an increasingly cautious consumer.”
The third-largest U.S. lender said delinquency levels were still low compared to historical levels, but it set aside more money to cover souring loans.
Wells Fargo said it was seeing charge-offs, or loans written off, increasing in its credit card portfolio. Average commercial and customer loans were down from the second quarter as higher rates and a slowing economy weakened loan growth, Wells Fargo CEO Charlie Scharf said on an analyst call.
“While the economy has continued to be resilient, we are seeing the impact of the slowing economy with loan balances declining and charge-offs continuing to deteriorate modestly,” said Scharf in the bank’s press release.
Regional lender PNC Financial Services, meanwhile, reported higher consumer loan delinquencies.
Bank executives also reiterated worries that sweeping new capital rules proposed in July could crimp lending and cause them to exit some products.
However, the outlook was not as negative as some banks previously thought. JPMorgan Chase said its economists had revised their outlook for the economy early this quarter to modest growth for a few quarters into 2024, rather than showing a mild recession, which fed into its decision to release net reserves of $113 million.
Citi and Wells Fargo, meanwhile, reported lower provisions for bad loans than analysts expected.
JPMorgan said in its earnings call that spending growth had now reverted to pre-pandemic trends, with consumers starting use up their savings.
“Currently, U.S. consumers and businesses generally remain healthy, although consumers are spending down their excess cash buffers,” said JPMorgan CEO Jamie Dimon.
HIGHER EARNINGS, LOWER DEPOSITS
Banks generally reported higher net interest income (NII), or the difference between what they earn on loans and pay out on deposits, as they benefited from higher interest rates.
JPMorgan, Citigroup and Wells Fargo, the first, third and fourth biggest U.S. lenders, respectively, also increased their outlook for NII.
Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago, which owns JPMorgan shares, said “what you are seeing is the big banks with really diverse businesses had quite good earnings.”
Dimon said the results benefited from “over-earning” on NII although that would normalize over time. Bank executives said they did not consider the current NII levels to be sustainable.
By contrast, PNC’s NII declined. The bank said that higher yields on interest-earning assets were more than offset by increased funding costs.
JPMorgan Chase, Wells, Citi and PNC all reported a decline in average deposits.
The banks also cautioned about proposed bank capital hikes by regulators, which they said if could make a number of their products and services uneconomical.
Shares of JPMorgan and Wells Fargo rose between 1% and 3%. Citi’s stock closed slightly lower, reversing an earlier gain, and PNC fell. The KBW index of bank shares, which includes regional lenders, slid 0.4%.
“Bank stocks have been priced for nothing but bad news for a while and have significantly underperformed,” said Rick Meckler, a partner at Cherry Lane Investments, a family investment office.
“Today is truly a relief rally where investors see the picture for the major money center banks is not as negative as they feared, particularly their outlook.”
