Banks In The U.S. Point To A Resilient But Slowing Economy

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July 14, 2023 (Reuters) Major U.S. banks have reported increased profits due to higher interest rates, highlighting the economy’s strength. However, they have also expressed concerns about potential risks, such as reduced consumer spending and mounting losses in credit cards and office commercial real estate.

Positive financial results from JPMorgan Chase, Wells Fargo, and Citigroup initially sparked investor enthusiasm. However, they have become wary, fearing that these results may represent a peak in performance for the foreseeable future.

What Are Analysts Saying About the Unusual Economic Environment? 

Citigroup CEO Jane Fraser acknowledged the unusual economic environment characterised by higher inflation, higher interest rate levels, and a robust labour market. However, she said that there should not be excessive concern about U.S. consumers’ overall health.

JPMorgan Chase and Wells Fargo reported significant net interest income increases, contributing to profit growth. Citigroup faced weakness in its trading business, which overshadowed interest income gains. Similar challenges are anticipated for other banks heavily reliant on Wall Street activities, such as Goldman Sachs and Morgan Stanley. It will be when they release their financial results next week.

Separately, the world’s largest asset manager, BlackRock, surpassed profit expectations for the second quarter. However, it displayed a slowdown in money inflows, indicating a potential deceleration in business expansion.

U.S. custodian bank State Street Corp. exceeded profit estimates for the second quarter, driven by an 18% year-on-year increase in interest income. Nevertheless, the bank experienced a 10% quarterly decline in interest income due to lower average non-interest-bearing deposit balances. State Street anticipates a further decrease of 12–18% in net interest income sequentially, primarily caused by reduced deposit levels. Large banks have observed declining deposits as consumers seek higher yields elsewhere.

In response to these developments, State Street’s shares closed down 12%, while JPMorgan’s shares rose by 0.6%. Wells Fargo’s shares dropped by 0.3%, Citigroup’s shares fell by 4%, and BlackRock’s shares declined by 1.5%.

Brian Mulberry, client portfolio manager at Zacks Investment Management, expressed concern that loan demand could deteriorate further if interest rates rise.

The latest bank results provide insights into the U.S. economy. Investors have been worried that the U.S. Federal Reserve’s aggressive interest rate hike campaign to combat inflation may lead to an economic recession. However, the outlook remains highly uncertain.

JPMorgan Chief Executive Jamie Dimon remarked that the U.S. economy continues to thrive. Nonetheless, he noted that consumers are gradually depleting their cash reserves.

Bank executives said U.S. consumers, who drive the economy, still possess healthy finances. However, they cautioned that spending is slowing and that consumer debt has declined modestly.

Weekly data from the Federal Reserve indicates a slowdown in consumer borrowing. Bank credit card lending experienced its highest growth rate in October 2022 after two years of significant increases, but has since moderated. Auto loans are the main drag on consumer lending, reaching peak growth in 2022 and turning negative in April.

Wells Fargo CEO Charlie Scharf Prediction

Wells Fargo reported a modest deterioration in consumer charge-offs, indicating debts the bank does not expect to recover. Citigroup highlighted rising delinquency rates on credit cards and other retail lines, expecting them to return to “normal levels” by the end of the year.

Wells Fargo CEO Charlie Scharf predicted a narrowing range of economic scenarios in the coming quarters. Although the current financial performance exceeds expectations, it will likely slow down.

BlackRock CEO Larry Fink anticipates a challenging economic environment. He emphasised that inflation will persist at higher levels than the market assumes, fluctuating between 2% and 4%.

Furthermore, deposit levels at major banks have declined for over a year. It is due to the annual growth rate turning negative in October and reaching a record low of 6% in April.

JPMorgan Expects a Modest Decline in Deposits.

Investment banking and trading businesses, which have weighed on earnings in recent quarters, continue to do so. While some executives noticed early signs of recovery in certain segments of these businesses, they refrained from declaring a definitive turning point.

JPMorgan highlighted “green shoots” in trading and investment banking but maintained that it was too early to identify a definitive trend.

JPMorgan and Wells Fargo have set aside additional funds to cover expected losses from commercial real estate loans. It indicates increased stress in this sector.

Wells Fargo reported an increase of $949 million in its credit loss provision, primarily due to potential losses on commercial real estate office loans and higher credit card loan balances. CEO Charlie Scharf acknowledged that the bank is preparing for anticipated weakness in the office market over time. However, significant losses have not yet been observed.

These three banks have begun the earnings season. Bank of America and Morgan Stanley will announce their results on July 18, followed by Goldman Sachs on July 19.