October 13th 2023.
Major U.S. banks reported on Friday that higher interest rates helped boost profits despite the economy slowing down and consumers exhibiting signs of more cautious behavior. JPMorgan, Wells Fargo, and Citigroup all noted that the Federal Reserve's aggressive monetary policy had made it more expensive for consumers and businesses to borrow and repay debt.
Citigroup CEO Jane Fraser observed a deceleration in spending, indicating that "an increasingly cautious consumer" was emerging. The bank also set aside more money to cover any potential souring loans. Wells Fargo's CEO, Charlie Scharf, echoed a similar sentiment, noting that while the economy was still resilient, loan balances were declining and charge-offs were increasing modestly.
PNC Financial Services reported higher consumer loan delinquencies, and all the banks warned of the impact of sweeping new capital rules proposed in July. The rules could potentially lead to the banks exiting some products and reduce their ability to lend.
On a brighter note, JPMorgan Chase reported that their economists had revised their outlook for the economy from a mild recession to modest growth for the next few quarters until 2024. Citi and Wells Fargo both reported lower provisions for bad loans than analysts had expected. JPMorgan also noted that consumer spending had reverted to pre-pandemic trends, and consumers were starting to use up their savings.
Overall, the banks reported higher net interest income as they benefited from higher interest rates. Shares of JPMorgan and Wells Fargo rose between 1% and 3%. While Citi's stock closed slightly lower, PNC's stock fell. The KBW index of bank shares was also down 0.4%. Rick Meckler, a partner at Cherry Lane Investments, commented that bank stocks had been priced for nothing but bad news for a while and had significantly underperformed. He said the relief rally was due to investors seeing that the outlook for the major money-center banks was not as negative as they had feared.
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