NEW YORK, April 14 (Reuters) – US banking heavyweights reaped the windfall of higher interest payments in the first quarter, brushed aside a crisis sparked by the collapse of two regional lenders and set aside billions of dollars in case credit tightens due to the economic outlook deteriorate dims.
First quarter 2023 results from JPMorgan Chase & Co (JPM.N), Citigroup Inc (CN) and Wells Fargo & Co (WFC.N) on Friday beat Wall Street expectations as consumer and corporate spending eased amid interest rate hikes halted, although all three saw signs of a slowdown and took appropriate precautions.
“Goliath is winning,” Wells Fargo analyst Mike Mayo said in a note, citing a “uniquely strong quarter” for JPMorgan and calling it “a haven in the storm” during the recent banking sector turmoil.
JPMorgan’s shares are up 7.6%, its largest one-day percentage gain since November 2020.
Banks are piling up cash for rainy days as fears of an economic slowdown mount on the back of the US Federal Reserve’s aggressive rate hikes to curb inflation, as well as the recent turmoil fueled by the collapse of two mid-tier banks.
JPMorgan CEO Jamie Dimon warned that while the US economy remains resilient, last month’s banking crisis, with the sudden collapse of Silicon Valley Bank (SVB) and Signature Bank, could make lenders more conservative and hurt consumer spending.
“The storm clouds we’ve seen over the past year remain on the horizon, and the turmoil in the banking industry is adding to those risks,” Dimon said.
Citigroup, which also beat Wall Street expectations as it earned more from borrowers paying higher interest rates on loans, said it was prepared for a mild US recession
“It’s now more likely that the US will enter a mild recession later this year,” Citigroup CEO Jane Fraser told analysts on a conference call. “That could deepen in depth and duration in a more severe credit crunch.”
Still, she said that “the biggest unknown” is the impact of US interest rates and how talks in Washington on the US debt ceiling will play out.
Shares of several banks rose on the results and the S&P 500 Bank Index (.SPXBK) closed up 3.5%. Citigroup rose 4.8%. Wells Fargo investors were less impressed, dragging shares down 0.05%.
Regional bank stocks weighed on the index with their biggest losers, Zions Bancorp (ZION.O) and First Republic Bank (FRC.N), both falling more than 3%. After falling sharply earlier in the day, PNC Financial Services Group (PNC.N), which reported an 18.5% increase in profit in the first quarter, managed to squeeze in a gain of 0.36%.
The KBW Regional Bank Index (.KRX) closed down 2.2%.
One area where big banks found it harder to turn a profit in 2023 was investment banking, reflected in JPMorgan’s business with a 24% drop in unit sales as dealmaking faltered amid high interest rates, inflation and fear before a recession.
TROUBLE AHEAD?
JPMorgan beat market expectations with earnings up 52% to $12.62 billion, or $4.10 a share, in the three months ended March, while its loan loss provision rose 56% year over year to 2.3 billion dollars increased. Net interest income, a measure of how much a bank makes from lending, rose 49%.
The bank also reported an increase in deposits in the first quarter as fears over the health of regional lenders prompted customers to move their money to larger banks.
Citigroup committed $241 million to cover potential loan losses, compared with a $138 million reserve release a year ago.
Wells Fargo set aside $1.21 billion to cover potential loan losses in the quarter, compared to a $787 million release a year ago.
Wells Fargo said its provision included a $643 million increase in the allowance for loan losses, which reflects an increase in commercial real estate lending, primarily office loans, as well as an increase in credit card and auto loans.
“While most consumers remain resilient, we have seen that some trends in consumer financial health have begun to weaken from a year ago,” Wells Fargo chief financial officer Mike Santomassimo told analysts. The company is taking steps “to position the portfolio for a slowing economy,” he said.
In another key area of the financial services sector, BlackRock Inc (BLK.N) — the world’s largest money manager — reported an 18% fall in first-quarter earnings, but it beat analysts’ estimates as investors continued to pour money into its funds to support the company to cushion the blow to bankruptcy fee income that rocked global markets.
More banking results are due in the coming week including Bank of America (BAC.N) and Goldman Sachs (GS.N) on Tuesday and Morgan Stanley (MS.N) on Wednesday.
Investors are also eagerly awaiting reports from several regional banks – which were hardest hit during last month’s banking turmoil – for more clarity on their outlook.
Financial broker Charles Schwab (SCHW.N) is expected to report an increase in revenue when it reports earnings on Monday, followed by Western Alliance Bancorp (WAL.N) on Tuesday.
Zions reports Wednesday.
First Republic, which was backed by a group of 11 lenders who injected $30 billion after its shares plummeted during last month’s crisis, is due to report results on April 24.
Additional reporting by Niket Nishant, Noor Zainab Hussain, Mehnaz Yasmin, Manya Saini, Jaiveer Singh Shekhawat and Bansari Kamdar from Bengaluru and Davide Baruscia in New York; writing from Alexander Smith; Editing by Mark Porter
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