The minor crisis in US banking this year has been very good for the industry’s major players. Earnings reports on Friday showed Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. gained big time from their size and the extra support the Federal Reserve injected into the banking system in March.
As JPMorgan reported its most profitable quarter ever, all three increased forecasts for annual net interest income, encouraged by less-than-expected competition for deposits alongside higher interest rates on loans. At the same time, a long-expected jump in bad debts still hasn’t arrived. Losses on credit card loans are ticking higher, but gently, and while commercial mortgages on office blocks are a concern, the pain is yet to come.
The Fed rushed to prop up bank liquidity in the spring as regional lenders reeled and four failed, including the second-biggest bank collapse ever with Silicon Valley Bank. The flood of cash helped stabilize deposits and kept competition for funding lower than it might have been, especially for the biggest names like JPMorgan, which were already attracting the customers of smaller rivals.
JPMorgan also gained deposits during the second quarter from the addition of First Republic Bank, another spring meltdown, which the biggest US lender acquired out of the Federal Deposit Insurance Corp. Without this deal, its total deposits would have declined marginally as they did at Citigroup and Wells Fargo. Without the fear surrounding smaller banks and the Fed’s liquidity in the system, deposit competition would likely have been even sharper.
The upshot is that banks are still paying less for their funding than they thought they would be, and they are over-earning on the gap between deposit costs and lending rates. Jeremy Barnum, JPMorgan’s chief financial officer, said the bank expected its run-rate for net interest income to be substantially below current levels in the medium term.
He had said a similar thing when the bank lifted its full-year forecast for net interest income, excluding its trading business, to $81 billion in its first-quarter results in April. On Friday, it raised the bar again to $87 billion for this year. When things normalize, Barnum expects the bank to earn closer to $75 billion annually, he added. Citigroup and Wells Fargo both upped their guidance too, though by smaller amounts.
Employment has remained very strong in the US, which is helping to keep loan losses lower than if borrowers were starting to lose their jobs. All the banks lifted provisions for losses on credit cards, but this was as much due to increased borrowing as people keep spending as it was to customers struggling to repay. Loss rates on credit card lending picked up but remain below the levels recorded before the Covid-19 pandemic and lower than what each bank sees as normal.
Commercial real estate lending, which investors have expected to become a problem area for some months already, is also still not deteriorating. Wells Fargo put more money aside than expected for bad property loans, mostly related to offices, but Chief Executive Officer Charlie Scharf said the bank hasn’t seen significant losses yet. “We are reserving for the weakness that we expect to play out in that market over time,” he said in a statement.
The investment banking and trading businesses continue to struggle. Barnum said dealmaking faced headwinds and, while equity fundraising picked up a bit in June, it was too early to talk about green shoots. At JPMorgan and Citigroup, investment banking fees and revenue from equities trading slid versus the previous year, something that has been going on for several quarters already.
Bond, currency and commodity trading revenue also fell at both banks versus the same quarter last year, marking the first year-on-year decline in five quarters. This business, which has boomed in the past year, had to start normalizing sooner or later, but both banks are still generating much greater quarterly revenue from such trading than they were pre-Covid.
This period of over-earning from volatile bond markets, high-interest rates, and resilient consumers can’t last forever. For the banks, the key will be keeping a tight rein on expenses and being prepared for the chances of a rougher landing for the economy even as the likelihood of a soft one appears to be improving.
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