Higher interest rates increase the assets of the country’s largest banks. They don’t do the same for the banks’ customers.
Profits at JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) rose in the third quarter, largely because high interest rates allowed them to earn more interest income.
Their size allows them to take advantage of these interest rates by charging more for loans while keeping the higher amount for deposits low compared to smaller competitors.
These benefits are reflected in a key profitability metric called net interest income, which measures the difference between what banks earn for their loans and what they pay for their deposits.
This number has increased significantly at all three banks compared to the same period last year. Together, lenders took in a record $50 billion, up 18% from the same period last year. JPMorgan and Wells Fargo even raised their forecast for the net interest income they would generate for the full year.
However, there were also clear signs that some of their borrowers were in trouble. JPMorgan, Citigroup and Wells Fargo all increased the amount of loans they wrote off as losses. Combined write-offs at these three banks totaled $3.98 billion, up 31% from the previous quarter and up 105% from the same period last year.
The total amount was the highest for the three lenders combined since the early days of the pandemic in the second quarter of 2020.
At Citigroup, CEO Jane Fraser warned that US consumers would take austerity measures. “The continued slowdown in spending points to an increasingly cautious consumer,” she said in a news release.
Nearly all of the increase in spending comes from wealthy customers, and there is a weakness among customers with poorer credit. Citi expects its credit card losses to reach pre-COVID-19 levels by the end of the year.
Jane Fraser, CEO of Citigroup. (Elizabeth Frantz/Portal)
Wells Fargo CEO Charlie Scharf said that even as the economy remains robust, “We are seeing the impact of the slowing economy with loan balances declining and charge-offs continuing to deteriorate slightly.”
The story goes on
Wells Fargo had $850 million in write-downs, including $622 million on consumer loans. The bank expects its net interest income to decline 3% from the third quarter to the fourth quarter.
“Wells Fargo is seeing weakness,” said CFO Mike Santomassimo, in commercial real estate, and “I think we will see some loss accretion in that portfolio over time.”
Charlie Scharf, CEO of Wells Fargo. (Mike Blake/Portal)
JPMorgan CEO Jamie Dimon struck a darker tone. He said consumers and businesses “remain generally healthy,” but consumers are shedding their excess cash cushions at a time when inflation risks remain high, raising the possibility that interest rates could rise even further.
Wars in Ukraine and Israel could also impact energy, food markets, global trade and geopolitical relations, he added.
“This could be the most dangerous time the world has seen in decades,” he said.
He acknowledged that the bank is “overearning both in terms of net interest income and below normal in terms of borrowing costs, both of which will normalize over time.” He told reporters there was a “big debate” within the bank about when that normalization would take place.
“I personally think it will happen a little sooner than Jeremy,” he said, referring to his CFO.
Jamie Dimon, CEO of JPMorgan. (Evelyn Hockstein/Portal)
Dimon, Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence, told Yahoo Finance on Friday that he was “trying to exercise some caution.”
He added that the bank knows that borrowing costs will rise. “They’re trying to prepare the road for tougher times to come.”
One regional bank, PNC (PNC), highlighted the problems faced by smaller lenders during this time of higher interest rates. Its profits and revenue declined year-over-year, as did its net interest income. Net interest income is expected to decline again in the fourth quarter compared to the third quarter.
The Pittsburgh bank said it would reduce its workforce by about 4%, saving $325 million. Several other regional banks, including Truist (TFC), have also cut jobs in recent months to adapt to more uncertain economic conditions.
PNC shares fell 3% on Friday, while Citigroup shares sold off slightly later in the day. JPMorgan and Wells Fargo both rose.
“The tipping point,” PNC CEO William Demchak said when asked whether PNC’s net interest income has bottomed out, “I think depends entirely on what happens with the Fed in the coming year.”
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