Profitability remains strong for major US banks, with JPMorgan Chase (JPM) and Wells Fargo (WFC) reporting impressive gains in the second quarter. Despite concerns about the economy’s trajectory, higher interest rates continue to propel these financial giants forward.
There were uncertainties leading up to this earnings season, as analysts predicted a 7% decline in earnings per share due to inflation and unfavorable conditions for deal making. However, these fears have yet to materialize.
While net charge offs (debt unlikely to be repaid) have slightly increased compared to last year, bank executives noted that levels are more in line with the pre-pandemic economy rather than a recessionary one.
Although many banks are still due to release their financial results over the next two weeks, the initial outlook for the sector is positive.
JPMorgan reported a remarkable 67% surge in profit year-over-year, partly attributed to its acquisition of troubled First Republic Bank. Wells Fargo also experienced a significant climb of 57% in profit. Citigroup (C), on the other hand, saw a 36% drop, primarily driven by a decline in deal making. However, Citigroup’s results still exceeded expectations.
Net interest income was a key focus, and all three banks performed well in this area, collectively earning $49 billion. Rising interest rates have been advantageous for lenders, enabling them to generate higher interest on loans without facing substantial pressure to increase interest paid to depositors. Consequently, both JPMorgan and Wells Fargo raised their net interest income forecasts for the year ahead.
The Changing Landscape of Banking
As interest margins continue to shrink, savers are becoming increasingly aware that complacency is no longer an option. In the most recent quarter, JPMorgan saw its net interest margin decline from 2.63% to 2.62%, while Wells Fargo experienced a similar drop from 3.2% to 3.09%.
According to Jamie Dimon, the CEO of JPMorgan, pricing power is becoming scarce in the banking industry. During a call with analysts, Dimon stated that it is inevitable for deposit betas to rise. This sentiment is echoed across the industry, as large banks are no longer viewed as the only safe havens amidst regional banking turbulence. With the collapse of Silicon Valley Bank, Signature Bank, and First Republic earlier this year, customers have realized that stability can be found in various institutions.
Despite surviving the recent challenges unharmed, banks are now facing new regulatory demands from the Federal Reserve. Increased capital requirements are being imposed to safeguard against potential crises. While this move is intended to ensure the stability of the sector, it may result in a decrease in lending capability as banks allocate more capital for compliance purposes.
This potential constraint in lending capacity could push customers to seek alternative sources of financing. Hedge funds, private equity firms, and private credit providers like Apollo and Blackstone are poised to benefit from this shift. As Jamie Dimon commented when asked about Apollo’s recent success, “They’re dancing in the streets.”
While investors in traditional banks may not have cause for celebration, they also have no reason to worry. The changing landscape presents new opportunities and challenges for the industry as a whole.