Two out of the three major U.S. banks surpassed investor expectations on Friday, kicking off the financial sector’s quarterly earnings season.
However, their earnings reports revealed the ongoing impact of higher interest rates and an economy that’s losing steam.
Citigroup (C) impressed with a 10% increase in net income compared to last year. Meanwhile, JPMorgan Chase (JPM) and Wells Fargo (WFC), despite beating analyst forecasts, saw profits dip when excluding one-time items.
This news sent shares of all three banks tumbling: JPMorgan’s down 1.2%, Citigroup’s 1.8%, and Wells Fargo a steep 6%, marking it as the S&P 500’s worst performer on Friday.
Net Interest Income Takes a Hit
Net interest income, crucial for banking profitability, declined from the first quarter across all three banks. Loan balances either stagnated or dropped, and additional reserves were set aside for potential credit losses.
JPMorgan Chase’s net interest income fell to $22.8 billion, down from $23.1 billion in the first quarter and $24.1 billion in the fourth quarter.
Wells Fargo saw a decline to $11.9 billion from $12.2 billion, and Citigroup’s dipped slightly to $2.7 billion.
The Fed’s interest rate hikes, starting in early 2022, initially boosted net interest income. However, rising deposit costs have now offset the gains from higher loan charges.
Anticipated rate cuts, possibly as early as September, could temporarily lift net interest income as deposit costs adjust faster than some loan rates.
Rising Credit Loss Provisions
Rate cuts might indicate the Fed expects enough economic cooling to curb inflation. Yet, a slowing economy raises concerns about borrowers’ ability to repay loans.
In the second quarter, JPMorgan increased its credit loss provisions to $3 billion, up from $1.9 billion in the first quarter.
Wells Fargo’s provisions rose to $1.2 billion from $938 million, writing off $1.3 billion in bad loans, $146 million more than the previous quarter.
Citigroup’s provisions grew by $112 million to $2.5 billion, a 36% increase from a year ago.
Large banks have more diversified loan portfolios than smaller regional banks, which are more exposed to the struggling commercial real estate sector.
This quarter’s results may highlight even greater challenges for regional banks when they report later this month.
Stagnant Loan Growth
As major banks prepare for more loan defaults, they’re hesitant to issue new loans. JPMorgan Chase reported $1.3 trillion in loans outstanding, unchanged for the fourth consecutive quarter.
Wells Fargo’s average loans outstanding fell for the fourth straight quarter to $917 billion, down $11 billion. Citigroup’s loans increased by 2% to $688 billion but were down $1 billion from the end of 2023.
Future Fed rate cuts could encourage loan growth by making borrowing more affordable. The challenge for banks will be to issue enough new loans to offset the lower interest rates they’ll receive.
In summary, while the major banks managed to exceed expectations, the reality of rising interest rates and a cooling economy looms large.
As banks brace for potential credit losses and stagnant loan growth, the financial sector’s resilience will be put to the test.
Investors and business leaders alike are watching closely, as the interplay of economic factors continues to shape the landscape of banking profitability.
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