JPMorgan, Citi, Wells Fargo beat expectations with first-quarter earnings riding on interest rate hikes

In the first quarter of 2023, JPMorgan Chase & Co, Citigroup, and Wells Fargo & Co reported impressive earnings due to higher interest payments, despite the banking crisis triggered by the collapse of two regional lenders. These banks were able to brush off the crisis and set aside billions of dollars in case of loan defaults as the economic outlook darkened.

Consumer and corporate spending remained steady despite rate increases, leading to all three banks beating Wall Street expectations. However, they also reported signs of a slowdown and made provisions accordingly. JPMorgan, in particular, saw a surge in its shares, which jumped by 7.6 per cent in its biggest one-day percentage gain since November 2020.

Banks are currently building up their rainy day funds in response to mounting fears of an economic slowdown from the US Federal Reserve's aggressive interest rate hikes to curb inflation, as well as the recent turmoil caused by the failures of two mid-sized banks.

JPMorgan CEO Jamie Dimon warned that although the US economy remains strong, the recent banking crisis could make lenders more cautious and impact consumer spending. "The storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks," Dimon said.

JPMorgan reported a 52 per cent increase in profit to $12.62 billion, or $4.10 per share, in the first quarter, beating market expectations. Its loan loss provisions increased by 56 per cent from last year to $2.3 billion. Net interest income, which measures how much a bank earns from lending, surged by 49 per cent. The bank also saw a surge in deposits in the first quarter as customers moved their money to bigger banks due to fears over the health of regional lenders.

Citigroup also beat Wall Street expectations, thanks to higher interest payments from borrowers, but CEO Jane Fraser told analysts on a conference call that the U.S. is more likely to enter a mild recession later this year. "That could be exacerbated in depth and duration in a more severe credit crunch," Fraser said.

Citigroup allocated $241 million towards potential loan losses, marking a contrast with the $138 million reserve release reported a year prior. Meanwhile, Wells Fargo set aside $1.21 billion during the quarter to cover potential loan losses, which represented an increase from the $787 million reserve release recorded in the same period last year. This provision included a $643 million surge in the allowance for credit losses, mainly attributed to the rise in commercial real estate lending, especially office loans, along with an increase in credit card and auto loans.

Wells Fargo CFO Mike Santomassimo told analysts that while most consumers remained resilient, some consumer financial health trends had weakened gradually from a year ago. The company is taking action "to position the portfolio for a slowing economy," he said.

More banking results are expected over the coming week, including Bank of America and Goldman Sachs on Tuesday and Morgan Stanley on Wednesday.

(With Agency inputs)

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