*Originally published by Reuters.com
NEW YORK, Oct 13 (Reuters) – Major U.S. banks said on Friday higher interest rates had boosted profits even as the economy slowed and consumers showed signs of more cautious behavior.
Earnings from JPMorgan (JPM.N), Wells Fargo (WFC.N) and Citigroup (CN) suggested that higher interest rates from the Federal Reserve had allowed them to demand more loans while raising deposit rates more slowly. Banks said consumers had begun depleting their savings, and Citibank and Wells Fargo noted that losses on credit cards and other debts were beginning to mount.
The Fed’s aggressive monetary policy has made it more expensive for consumers and businesses to borrow and repay debt, while banks are slowing the flow of credit and increasing cash holdings after Silicon Valley Bank and two other lenders collapsed earlier this year.
Citigroup CEO Jane Fraser said she sees a continued slowdown in spending, indicating “an increasingly cautious consumer.”
The third-largest U.S. lender said delinquencies were still low by historical standards, but it had set aside more money to cover bad loans
Wells Fargo said it was seeing an increase in charge-offs, or loan write-offs, across its credit card portfolio. Average business and consumer loans fell compared to the second quarter as higher interest rates and a slowing economy weakened loan growth, Wells Fargo CEO Charlie Scharf said in an analyst conference call.
“While the economy has continued to demonstrate resilience, we are seeing the impact of the slowing economy as loan balances decline and charge-offs continue to deteriorate slightly,” Scharf said in the bank’s press release.
Regional lender PNC Financial Services (PNC.N), meanwhile, reported higher consumer loan defaults.
Bank executives also reiterated concerns that sweeping new capital rules proposed in July could restrict lending and lead them to withdraw from some products.
However, the outlook was not as negative as some banks previously thought. JPMorgan Chase said its economists revised their outlook for the economy earlier this quarter to moderate growth for a few quarters through 2024 rather than showing a mild recession, leading to the company’s decision to hold net reserves of $113 million -release dollars.
Citi and Wells Fargo, meanwhile, reported lower provisions for bad loans than analysts expected.
JPMorgan said in its earnings release that spending growth has now returned to pre-pandemic trends and consumers have begun to deplete their savings.
“Right now, U.S. consumers and businesses in general are healthy, even as consumers are shedding excess cash reserves,” JPMorgan CEO Jamie Dimon said.
HIGHER YIELDS, LOWER INVESTMENTS
Banks generally reported higher net interest income (NII), or the difference between what they earn on loans and what they pay out on deposits, as they benefited from higher interest rates.
JPMorgan, Citigroup and Wells Fargo, the first, third and fourth largest US lenders respectively, also raised their outlook for NII.
Eric Kuby, chief investment officer at Chicago-based North Star Investment Management Corp, which owns JPMorgan shares, said: “What you’re seeing is that the big banks with really diverse lines of business had pretty good returns.”
Dimon said the results benefited from “overearning” at NII, although this would normalize over time. Bank executives said they do not believe current NII levels are sustainable.
In contrast, PNC’s NII fell. The bank said higher returns on interest-bearing assets were more than offset by increased funding costs.
JPMorgan Chase, Wells, Citi and PNC all reported declines in average deposits.
Banks also warned of planned increases in bank capital by regulators, which they said could make a number of their products and services uneconomic.
Shares of JPMorgan and Wells Fargo rose between 1% and 3%. Citi shares closed slightly lower, erasing an earlier gain, and PNC fell. The KBW index of bank shares (.BKX), which includes regional lenders, slipped 0.4%.
“Bank stocks have been priced on bad news for some time and have significantly underperformed,” said Rick Meckler, partner at Cherry Lane Investments, a family investment firm.
“Today is truly a recovery rally with investors seeing that the picture for the major money market banks is not as negative as they feared, particularly their prospects.”
Reporting by Saeed Azhar, Nupur Anand, Lewis Krauskopf, Tatiana Bautzer and Sinead Carew in New York; Niket Nishant, Manya Saini, Noor Zainab Hussain, Jaiveer Shekhawat and Pritam Biswas in Bengaluru; Ann Saphir in San Francisco; Editing by Megan Davies, Lananh Nguyen, Michelle Price and Nick Zieminski
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