NEW YORK (Reuters) – Major U.S. banks said on Friday that higher interest rates had boosted their profits despite a slowdown in the economy and consumers showed signs of more cautious behavior.
Earnings from JPMorgan (JPM.N), Wells Fargo (WFC.N) and Citigroup (CN) indicated that higher U.S. Federal Reserve interest rates allowed them to collect more on loans while raising deposit rates more slowly. Banks said consumers were beginning to exhaust their savings, and Citibank and Wells Fargo noted that losses on credit cards and other debt were beginning to rise.
The Federal Reserve’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 boosting cash levels after the collapse of Silicon Valley Bank and other lenders earlier this year.
Citigroup CEO Jane Fraser said she was seeing a continued slowdown in spending, indicating an “increasingly cautious consumer.”
The third-largest US bank said delinquency levels were still low compared to historical levels, but it had allocated more money to cover troubled loans.
Wells Fargo said it is seeing an increase in debits or loan write-offs in its credit card portfolio. Average business and consumer loans declined from the second quarter, as higher interest rates and a slowing economy dampened loan growth, Wells Fargo CEO Charlie Scharf said on a call with analysts.
“While the economy has continued its resilience, we are seeing the impact of the economic slowdown as loan balances decline and debt collections continue to deteriorate modestly,” Scharf said in the bank’s press release.
Meanwhile, regional lender PNC Financial Services (PNC.N) reported higher delinquency rates on consumer loans.
Bank executives also reiterated concerns that sweeping new capital rules proposed in July could hamper 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 revised their forecasts for the economy early this quarter to modest growth for a few quarters through 2024, rather than showing a moderate recession, which fueled its decision to release net reserves of $113 million.
Meanwhile, Citi and Wells Fargo reported lower bad loan provisions than analysts expected.
JPMorgan said on its earnings call that spending growth has now returned to pre-pandemic trends, with consumers starting to use their savings.
“For now, US consumers and businesses remain generally healthy, even though consumers are spending their excess cash reserves,” said Jamie Dimon, CEO of JPMorgan.
Higher profits, lower deposits
Banks generally reported higher net interest income (NII), or the difference between what they earn on loans and what they pay on deposits, as they benefited from higher interest rates.
JPMorgan, Citigroup and Wells Fargo, the No. 1, No. 3 and No. 4 lenders in the United States, respectively, also raised their National Insurance insurance outlook.
“What you’re seeing is that the big banks with really diversified businesses have made very good profits,” said Eric Coby, chief investment officer at Northstar Investment Management in Chicago, which owns JPMorgan shares.
Dimon said results benefited from “excess profit” on NII although that would normalize over time. Bank executives said they did not consider current national insurance levels sustainable.
In contrast, the Palestine National Party’s National Insurance Index fell. The bank said that higher returns on interest-bearing assets were offset by higher financing costs.
JPMorgan Chase, Wells, Citi, and PNC all reported declines in average deposits.
Banks also warned of proposed increases in bank capital by regulators, which they said could make a number of their products and services uneconomic.
JPMorgan and Wells Fargo shares rose between 1% and 3%. Citi shares closed slightly lower, reversing earlier gains, and PNC shares fell. The KBW Bank Stock Index (.BKX), which includes regional banks, fell 0.4%.
“Bank stocks have been priced in for bad news for a while and have underperformed significantly,” said Rick Meckler, a partner at Cherry Lane Investments, a family investment office.
“Today is really a comfortable rally as investors see that the picture for major money center banks is not as negative as they feared, especially their outlook.”
(Reporting by Saeed Azhar, Nupur Anand, Louis Krauskopf, Tatiana Putzer and Sinead Caro in New York – Preparing by Mohammed for the Arabic Bulletin) Niket Nishant, Manya Saini, Noor Zainab Hussain, Jaiveer Shekhawat, Pritam Biswas in Bengaluru; Anne Saphir in San Francisco; Edited by Megan Davies, Lanh Nguyen, Michelle Price, and Nick Zieminski
Our standards: Thomson Reuters Trust Principles.
“Extreme travel lover. Bacon fanatic. Troublemaker. Introvert. Passionate music fanatic.”