Large and regional banks began releasing third-quarter earnings reports on Oct. 13, showcasing continued gains from higher interest rates and warnings of economic sustainability and uncertainty.
The Ticker previously reported during the second quarter that banks’ net interest incomes were boosting profits. However, provisions for credit losses increased in preparation for defaulted loans.
JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. disclosed their third-quarter earnings on Oct. 13.
JPMorgan reported a 35% increase in net income, amounting to $13.2 billion and a 30% increase in net interest income, equating to $22.9 billion, while Citibank beat analysts’ expectations, delivering a 21.6% increase in net income totaling $3.5 billion, but saw a 1% decrease in net interest income equaling $13.8 billion. Wells Fargo reported a 6% increase in net income but a 0.4% decrease in net interest income.
JPMorgan CEO Jamie Dimon stated the bank “delivered another quarter of strong results” but highlighted that consumers’ dwindling excess cash buffers from the pandemic alongside geopolitical developments have created more economic uncertainty.
“Furthermore, the war in Ukraine, compounded by last week’s attacks on Israel, may have far-reaching impacts on energy and food markets, global trade and geopolitical relationships, “Dimon said in the earnings report. “This may be the most dangerous time the world has seen in decades. While we hope for the best, we prepare the Firm for a broad range of outcomes so we can consistently deliver for clients no matter the environment.”
Charlie Scharf expressed similar concerns as Dimon, noting the economy is resilient, but said “we are seeing the impact of the slowing economy” through declining loan balances and the stresses placed on consumers through charge-offs and delinquencies.
Delinquencies are the state of being past due on financial obligations such as debt, resulting in the company charging off the debt — the company believing it will not receive the money, causing it to write and sell off the debt to a debt collecting agency — and placing an entry on a borrower’s credit report leading to a decrease in credit score.
During the pandemic, favorable interest rates and government intervention through stimulus checks and frozen loan repayments increased loan demand. However, those borrowers are experiencing difficulties in repaying those loans.
“Consumer finance companies used this opportunity to juice up their growth at a time when funding was ample and consumers’ finances had gotten an artificial boost,” Mark Zandi, chief economist at Moody’s Analytics, told The Financial Times. “Certainly, a lot of lower-income households that got caught up in all of this will feel financial pain.”
Jane Fraser, CEO of Citibank, praised the bank’s growth in each of its core businesses amid its largest restructuring efforts but acknowledged that economic conditions are impacting client sentiment.
“The global macro backdrop remains the story of desynchronization. In the U.S., recent data implies a soft landing, but history would suggest otherwise, and we are seeing some cracks in the lower FICO consumers,” Fraser said to an analyst. “All of these macro dynamics have clearly impacted client sentiment. September is always a busy month being clients, and I’m struck how consistently CEOs are less optimistic about 2024 than a few months ago.”
The Federal Reserve’s interest rate hikes prompt consumers to invest more in higher-yielding alternatives, resulting in banks offering higher deposit payouts to avoid fluctuations.
JPMorgan, Wells Fargo and Citibank raised their payouts to depositors within the last year in anticipation of deposit competition and normalization, cutting into profits.
“Recognizing credit risk is exactly what banks have to do right now and I think the concern is that banks are not investable because of credit concerns and worse economic activity next year,” Christopher Marinac, director of research at Janney Montgomery Scott, said on an episode of CNBC’s Fast Money. “So the solution and the vaccine, if you will, is building reserves, creating new confidence and reminding investors that banks are going to continue to lend and continue to take deposits as they move through these next couple of quarters.”
