By Megan Davies and Lananh Nguyen
NEW YORK (Reuters) -Wall Street’s biggest banks stockpiled more rainy-day funds to prepare for a possible recession, while showing caution about forecasting income growth in an uncertain economy and as higher rates increase competition for deposits.
The outlook for big U.S. banks has been clouded by the Russia-Ukraine conflict and fading economic stimulus measures. Higher borrowing costs as the U.S. Federal Reserve hikes rates have softened demand for mortgages and car loans while raising the cost of deposits for banks.
JPMorgan Chase & Co, Wells Fargo & Co and Bank of America Corp gave either disappointing or uncertain outlooks for net interest income (NII), or the money banks bring in from interest payments, which is impacted by the amount they have to pay customers to keep deposits in their banks.
“The U.S. economy currently remains strong, with consumers still spending excess cash and businesses healthy,” said JPM Chief Executive Officer Jamie Dimon, although he said he didn’t yet know “the ultimate effect of the headwinds coming.” The bank flagged a modest deterioration in its macroeconomic outlook, “reflecting a mild recession in the central case.”
JPM, Bank of America, Citigroup Inc and Wells Fargo reported profits ranging from up 6% to down 50%. Strength in trading helped offset a slump in investment banking, while interest rate hikes by the U.S. Federal Reserve helped income.
“Today’s bank earnings were solid, with net interest income driving earnings, credit reserves significantly increasing year over year, and investment banking fees remaining low – all largely reflecting the interest rate and economic environment,” said KPMG US National Sector Leader for Banking and Capital Markets Peter Torrente.
JPM profit rose 6% on trading strength, and said it would resume share buybacks. Bank of America reported a 2% rise in profits as higher rates boosted income. However, Citi reported a 21% fall in profits, with investment banking taking a hit. Wells Fargo reported that its profit fell 50% as it racked up $3 billion in costs.
Shares were higher with JPM up 2.5%, Wells up 3.5%, Bank of America up 2.5% and Citi up 1.8%.
“What people are actually realizing is that the banks are probably going to continue to generate quite healthy returns over the course of 2023,” said Richard Ramsden, Goldman Sachs’ lead analyst on banks, despite higher rates and a slowing economy weighing.
Net interest income was one area singled out to come under pressure this year.
JPM’s Dimon said there was more competition for deposits as higher rates was causing customers to migrate to investments and other cash alternatives meaning the bank was “going to have to change saving rates.”
Bank of America said that its mix of global banking interest-bearing deposits had increased and it was “paying higher rates on those deposits to retain them.”
Ramsden said the banking industry is witnessing a trend of deposits going into treasury markets directly or money market funds that offer higher yields.
“You have to assume that some of these trends are going to persist,” Ramsden said.
UBS analysts in a note said that JPM’s guidance on NII of $74 billion, excluding markets, was below expectations. JPM in a conference call said the outlook for NII was particularly uncertain.
Bank of America said the outlook for interest rates was too uncertain to forecast NII for the year. Wells Fargo forecast NII up 10% this year versus 2022, which was below Refinitiv estimates of 16% growth. Citi in its investor presentation forecast NII of around $45 billion for 2023 versus $43.5 billion excluding markets in 2022.
The four banks set aside a total of around $4 billion in funds to prepare for soured loans: JPM set aside $1.4 billion, Wells Fargo $957 million, Bank of America $1.1 billion and Citi $640 million. Morgan Stanley and Goldman Sachs report next week.
Banks have been hit by a slump in mergers, acquisitions and initial public offerings, leading to job cuts by some banks like Goldman Sachs.
JPM’s investment banking unit’s saw revenues down 57% while Bank of America’s investment banking fees more than halved in the quarter. Those banks continued to add staff overall.
JPM’s trading revenue, however, gained from market volatility as investors repositioned bets to navigate a high interest rate environment.
Meanwhile, consumer businesses were a key focus in banks’ results. Household accounts have been propped up for much of the pandemic by a strong job market and government stimulus, and while consumers are generally in good financial shape, more are starting to fall behind on payments.
“The consumer still remains in pretty good shape,” said Bank of America’s Chief Financial Officer Alastair Borthwick. “There’s a lot of pent-up demand,” especially for travel, he said.
(Reporting by Saeed Azhar, Lananh Nguyen, Niket Nishant, Noor Zainab Hussain, Carolina Mandl, Manya Saini and Mehnaz Yasmin; Writing by Megan Davies; Editing by Nick Zieminski and Mark Porter)