Major U.S. banks, including JPMorgan, Wells Fargo, Citigroup, and PNC Financial Services, reported robust earnings on Friday, driven in part by higher interest rates, even as the economy showed signs of slowing and consumers exhibited more cautious behavior. The banks indicated that the Federal Reserve’s policy of raising interest rates allowed them to charge more on loans, increasing their net interest income (NII). At the same time, they were raising rates on deposits more gradually.
The Federal Reserve’s aggressive monetary policy, intended to combat rising inflation, made borrowing more expensive for both consumers and businesses, while banks took a more cautious approach by slowing the flow of credit and building up cash reserves following the recent collapse of Silicon Valley Bank and two other lenders earlier in the year.
Citigroup’s CEO Jane Fraser observed a deceleration in consumer spending, signaling “an increasingly cautious consumer.” Citibank also reported that delinquency levels were still low compared to historical levels but set aside more money to cover potential bad loans. Wells Fargo noted an increase in charge-offs in its credit card portfolio, indicating that some borrowers were struggling to repay their debts.
JPMorgan Chase stated that spending growth had returned to pre-pandemic trends, with consumers starting to dip into their savings. “Currently, U.S. consumers and businesses generally remain healthy, although consumers are spending down their excess cash buffers,” said JPMorgan CEO Jamie Dimon.
However, the banks remained concerned about sweeping new capital rules proposed in July, which they feared could limit lending and lead to exits from certain product lines. The outlook was not as negative as some banks had previously thought, though. JPMorgan Chase reported that its economists had revised their outlook for the economy to modest growth into 2024, rather than a mild recession.
One of the key metrics for the banks was their net interest income (NII), which represents the difference between the interest earned on loans and the interest paid out on deposits. JPMorgan, Citigroup, Wells Fargo, and PNC Financial Services all reported higher NII, which was boosted by rising interest rates. However, bank executives were cautious about the sustainability of current NII levels and said that over-earning in this area would normalize over time.
PNC’s NII, on the other hand, declined as higher yields on interest-earning assets were more than offset by increased funding costs. All four banks also reported a decrease in average deposits.
Banks generally expressed concerns about potential bank capital hikes by regulators, which could render some of their products and services uneconomical.
Following the earnings reports, shares of JPMorgan and Wells Fargo rose between 1% and 3%, while Citigroup’s stock closed slightly lower, reversing an earlier gain. PNC’s stock fell, and the KBW index of bank shares, which includes regional lenders, slid 0.4%.
This better-than-expected performance prompted a relief rally among investors, as the results suggested that the major money center banks’ outlook was not as negative as feared. It was a signal that the banks, with their diverse businesses, had posted strong earnings despite the challenging economic environment.