America’s biggest banks are benefiting from the Federal Reserve’s campaign to raise interest rates, charging more for consumer loans and corporate lines of credit without offering customers significantly better rates on deposits .
However, major lenders, including JPMorgan ChaseCitigroup and Wells Fargo made it clear on Friday that the central bank’s aggressive policy could cost them in the long run, increasing provisions for possible credit losses as a result of an economic downturn.
Banks’ results were helped by net interest income – the difference between what they pay on deposits and earn on loans and other assets. JPMorgan reported NII of $17.6 billion in the third quarter, up 34 percent year-over-year and a new record for the bank. wells and City reported their best NII numbers since 2019.
At the same time, banks are seeing increased demand for many lending products as businesses tap into lines of credit to stock inventory and consumers borrow with credit cards.
“When all is said and done, we think for our composite, this is going to be a record quarter for net interest income,” said Jason Goldberg, banking analyst at Barclays, referring to the 20 largest US banks by capitalization. of market.
Both JPMorgan and Wells increased their full-year guidance for NII: JPMorgan now forecasts its NII, excluding its trading division, in 2022 to rise about 38 percent this year, while Wells predicts it will rise 24 percent year over year. . Citi left its guidance unchanged, expecting to increase NII by $1.5 billion to $1.8 billion in the fourth quarter.
“In all three cases, I think it’s fair to say that net interest income beat our expectations and beat Street’s expectations,” said Chris Kotowski, an analyst at Oppenheimer in New York.
The negative consequences of the Fed’s policy could come later. By raising its benchmark policy rate to a target range of 3 percent to 3.25 percent from near zero in March, the central bank has increased the chances of a recession. Economic downturns are treacherous for banks, because credit losses typically mount and spending slows.
Although banks used the quarter to set aside additional funds to cover potential credit losses, they also sounded an optimistic tone about their ability to weather any downturn.
“We would have very good returns in a recession,” JPMorgan Chief Executive Jamie Dimon told analysts.
Lending activity is picking up just as investment banking fees are seeing a dramatic slowdown in trading activity. At JPMorgan, investment banking revenue fell 43% year over year to $1.7 billion, while at Citi fees fell 64% to $631 million.
“You’re seeing strong tailwinds from conventional banking mitigated by headwinds from Wall Street banking,” said Mike Mayo, a banking analyst at Wells Fargo, speaking of the industry broadly.
The question facing banks is whether they will still be able to enjoy the favorite “deposit betas,” which measure how much of rising interest rates the bank expects the bank to pass on to customers with interest-bearing accounts. Deposits are usually the cheapest source of financing for banks.
More sophisticated clients, such as corporations and financial institutions, are more likely to move their deposits into higher-yielding investments when interest rates rise. Corporate deposits at JPMorgan, Citi and Wells have fallen by nearly $120 billion over the past year, according to regulatory filings.
Because Citi’s retail banking business is smaller compared to its peers, it relies more on deposits from corporate clients that are more price sensitive. Citi’s net interest margin decreased to 1.99 percent from 2.31 percent a year ago.
JPMorgan Chief Financial Officer Jeremy Barnum told analysts that deposit betas were low by historical standards, in part due to the speed of the Fed’s rate hikes. However, several bank executives warned that, at some point, deposit rates would start to rise more in line with broader interest rates.
“Once the Fed raises rates, you’re going to see a lag before deposit prices start to rise,” Wells Chief Financial Officer Mike Santomassimo said on the bank’s earnings call. “That’s just normal and to be expected.”
