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US bank giants ride rate rises, keep storm clouds at bay

2023-04-14T18:13:02Z

U.S. banking heavyweights reaped windfalls from higher interest payments in the first quarter, brushing off a sector shakedown and taking the opportunity to set aside billions of dollars in case loans turn sour as the economic outlook dims.

First-quarter 2023 earnings from JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N) and Wells Fargo & Co (WFC.N) beat Wall Street expectations on Friday as consumer and corporate spending held up in the face of rate rises, although all three saw signs of a slowdown and made provisions accordingly.

“Goliath is Winning,” Wells Fargo analyst Mike Mayo said in a note highlighting growth, scale and resiliency in a “uniquely strong quarter” for JPMorgan, which he called “a port in the storm” during recent banking sector tumult.

Banks are building up rainy day funds as fears of an economic slowdown mount from the U.S. Federal Reserve’s aggressive interest rate hikes to tame inflation as well as the recent turmoil fueled by the failures of two mid-sized banks.

JPMorgan Chief Executive Jamie Dimon warned that while the U.S economy remains robust, the recent crisis in banking with the sudden collapse of Silicon Valley Bank (SVB) and Signature Bank last month could make lenders more conservative and at the same time impact consumer spending.

“The storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks,” Dimon said.

Citigroup, which beat Wall Street expectations as it earned more from borrowers paying higher interest on loans, said it was prepared for a mild recession in the United States.

“It’s now more likely that the U.S. will enter into a shallow recession later this year,” Citigroup CEO Jane Fraser told analysts on a conference call. “That could be exacerbated in depth and duration in a more severe credit crunch.”

Still, she said “the biggest unknown” was the impact of U.S. interest rates and how talks in Washington on the U.S. debt ceiling play out.

One area where it has proven harder for the big banks to profit in 2023 has been investment banking, which was reflected in JPMorgan’s business with a 24% fall in revenue at the unit.

Global mergers and acquisitions (M&A) activity shrank to its lowest level in more than a decade in the first quarter, as rising interest rates, high inflation and fears of a recession soured the appetite for dealmaking.

M&A volumes during the first quarter slumped 48% to $575.1 billion as of March 30, compared to $1.1 trillion during the same period last year, according to data from Dealogic.

JPMorgan beat market expectations with a 52% rise in profit to $12.62 billion, or $4.10 per share, in the three months to the end of March, while its loan loss provisions increased by 56% from last year to $2.3 billion. Net interest income, a measure of how much a bank earns from lending, surged 49% to $20.8 billion.

Citigroup was also helped by the effects of the Fed’s tighter monetary policy, although it set aside $241 million to cover potential loan losses compared to a reserve release of $138 million a year ago.

Meanwhile, Wells Fargo set aside $1.21 billion in the quarter to cover for potential loan losses, compared to a release of $787 million a year earlier.

Wells Fargo said its provision included a $643 million rise in the allowance for credit losses, reflecting an increase for commercial real estate lending, primarily office loans, as well as an increase for credit card and auto loans.

“While most consumers remain resilient, we’ve seen some consumer financial health trends gradually weakening from a year ago,” Mike Santomassimo, Wells Fargo finance chief, told analysts. The company is taking action “to position the portfolio for a slowing economy,” he said.

Meanwhile, PNC Financial Services Group (PNC.N) reported an 18.5% rise in first-quarter profit, as the Fed’s rate hikes fueled a surge in the U.S. regional lender’s net interest income (NII).

And in another key part of the financial services sector, BlackRock Inc (BLK.N) reported an 18% drop in first-quarter profit but beat analysts’ estimates as investors continued to pour money into its funds, cushioning the hit to fee income from the banking rout that rocked global markets.

New York-based BlackRock, the world’s largest asset manager which makes most of its money from fees on investment advisory and administration services, ended the first quarter with $9.1 trillion in assets under management, down from $9.57 trillion a year earlier but up from $8.59 trillion in the fourth quarter.

More banking results are due over the coming week, including Bank of America (BAC.N) and Goldman Sachs (GS.N) on Tuesday and Morgan Stanley (MS.N) on Wednesday.

Investors are also anxiously awaiting reports from several regional banks – the hardest-hit group during the banking tumult last month – for more clarity on the outlook ahead for them.

Finanicial broker Charles Schwab (SCHW.N) is expected to report a rise in revenue when it announces results on Monday.

Meanwhile Zions Bancorp (ZION.O) also reports on Wednesday.

First Republic Bank (FRC.N), which was shored up by a group of 11 lenders that injected $30 billion into it after its shares plunged during the crisis last month, is due to report results on April 24.

Related Galleries:

The Citigroup Inc (Citi) logo is seen at the SIBOS banking and financial conference in Toronto, Ontario, Canada October 19, 2017. Picture taken October 19, 2017. REUTERS/Chris Helgren

A Wells Fargo logo is seen in New York City, U.S. January 10, 2017. REUTERS/Stephanie Keith
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