September 21, 2023

Banking results are highly divided as the industry recovers from the turmoil

Earnings at JPMorgan Chase (JPM) and Wells Fargo (WFC) rose in the second quarter, while they fell sharply at Citigroup (C), showing a gap in how the banking industry is faring as it recovers from a period of extreme turmoil.

JPMorgan and Wells Fargo showed that some giants can continue to make big money from consumer lending even as industry deposit costs rise, leaning on their sprawling franchises to generate additional revenue.

What Citigroup revealed is that a number of issues continue to plague even the largest institutions, especially those that rely heavily on dealmaking and trading.

Citigroup’s earnings fell 36% in the second quarter, largely due to weakness in the Wall Street unit.

Other banks reporting next week, such as Goldman Sachs (GS) and Morgan Stanley (MS), could face similar challenges.

“The long-anticipated uptick in investment banking has yet to materialize, making for a disappointing quarter,” said Jane Fraser, CEO of Citigroup.

JPMorgan and Wells were essentially flat during Friday trading, while shares of Citigroup fell 4%.

Jane Fraser, CEO of Citigroup, testifies on Thursday, September 22, 2022 on Washington's Capitol Hill at an annual Senate Banking Committee Wall Street oversight hearing.  (AP Photo/Jacquelyn Martin)

Citigroup CEO Jane Fraser. (AP Photo/Jacquelyn Martin)

A warning to smaller banks

There was also a new warning for smaller banks on Friday. That came from State Street (STT), which was the nation’s 12th-largest street as of March 31.

In its second quarter results, State Street announced that its net interest income, which measures the difference between what it earns on loans and deposit payments, was down 10% compared to the first quarter.

This is largely due to rising deposit rates and a rotation by customers out of non-interest bearing deposits as they look for higher yields. The bank now expects net interest income to fall by 12% to 18% in the coming quarter.

Read more: High-yield savings account vs. CD: which is right for you?

“What we found is that our larger customers, and we have large, high-end customers in particular, are quite active in thinking about their alternatives, and… that’s been accelerated by the speed of this cycle and where we’ve come to and the speed,” said Eric Aboaf, CFO of State Street.

Some other medium-sized banks reporting their results in the coming weeks have already revised their expectations for how much of this income they can earn, including executives for US Bancorp (USB), Citizens Financial Group (CFG), Comerica (CMA), Huntington ( HBAN), KeyCorp (KEY), and Zions (ZION).

State Street shares closed 12% lower on Friday.

Navigating the chaos

The results kicked off a closely watched earnings season in which banks of all sizes will try to demonstrate that they have recovered from one of the industry’s most tumultuous periods since the 2008 financial crisis.

JPMorgan demonstrated its grip on the rest of the industry during the spring chaos by winning a government-run auction to buy most of First Republic’s business after regulators seized the San Francisco lender.

First Republic was one of three major regional banks to fail, along with Silicon Valley Bank and Signature Bank. Their seizures caused panic in the banking system and an outflow of depositors from a number of smaller banks.

The deal boosted JPMorgan’s second quarter numbers. It said First Republic added $2.4 billion to net income. That helped push total earnings to $14.5 billion, up 67% from the same period a year ago. Wells Fargo’s revenue of $4.9 billion was up 57%.

Problems on Wall Street

The sector is no longer at the same level of crisis as it was in the spring, but the second quarter results of some of the largest banks are a reminder that the sector still faces a number of challenges on several fronts.

For example, Citigroup struggled with a recent deal-making drought that is making day-to-day life more difficult for all of Wall Street. Investment banking revenues fell 24% to $612 million. Trading was another weakness. Turnover from that activity fell by 13%.

Citigroup and other companies with major investment banks and trading units have cut or announced about 12,000 jobs since the end of 2022. Deal making is drying up due to a rise in interest rates and economic uncertainty.

Even JPMorgan had challenges in this area. Investment banking costs fell 6% from a year ago to $1.5 billion. Trading income from equities and fixed-income securities also fell.

‘It’s going better than people expected’

What JPMorgan, Wells Fargo and Citigroup had in common Friday is that they are setting aside more money to cover future loan losses, a sign they expect the economy to slow in the coming quarters.

Many other banks are expected to do the same when they report their second quarter results.

Wells Fargo set aside $1.71 billion in loan loss provisions in the second quarter, compared to $580 million a year ago. That included an increase of $949 million, primarily for commercial real estate office loans.

“I think things are better than people expected at this point in the cycle,” said Mike Santomassimo, CFO of Wells Fargo. “We do expect them to be more weak in the [commercial real estate] market and it will take some time to play out. It’s going to be a while before we see you, the end of the end of this.”

CEO Charlie Scharf said the US economy “remains resilient”.

Jamie Dimon, CEO of JP Morgan, speaks at the Boston College Chief Executives Club luncheon in Boston, Massachusetts, US, November 23, 2021. REUTERS/Brian Snyder

JPMorgan CEO Jamie Dimon. REUTERS/Brian Snyder

Jamie Dimon, CEO of JPMorgan, also sounded optimistic about the US economy, saying it “remains resilient” and that “consumers are spending money, albeit at a slightly slower pace”.

Its CFO, Jeremy Barnum, told reporters the bank doesn’t expect much demand for loans, except for credit cards and cars. But “we don’t really expect to tighten, except to the extent that individual credit metrics deteriorate.”< /p>

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