Oct 14 (Reuters) – Profits at Wall Street’s biggest banks fell in the third quarter as they braced for a weaker economy while investment banking was hit hard, but investors saw a silver lining with some banks exceeding estimates.
JPMorgan Chase & Co (JPM.N), Morgan Stanley (MS.N), Citigroup Inc (CN) and Wells Fargo & Co’s (WFC.N) reported lower net profit after turbulent markets stifled the investment banking business and that lenders have set aside more funds for rainy days to cover the losses of borrowers who are late on payments.
“We’re in an environment where it’s a bit strange,” said JPMorgan chief executive Jamie Dimon, who said that while the bank “hopes for the best, we still remain vigilant and prepare for poor results. “.
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Central banks around the world are battling soaring inflation that is expected to cause an economic downturn. The Federal Reserve raised the benchmark interest rate from near zero in March to the current range of 3.00% to 3.25% and signaled further increases.
Rising rates tend to support bank earnings, but the broader risk of an economic slowdown caused by high inflation, supply chain bottlenecks and the war in Ukraine could weigh on earnings future.
On a conference call, Dimon said U.S. consumers remain strong and he doesn’t expect a recession, but “there’s a lot of headwinds out there.”
The money people have in their checking accounts ‘will likely run out by the middle of next year’ as they face headwinds like inflation, higher rates and mortgage rates higher, he warned.
Banks have set aside more money in anticipation of a possible economic downturn. JPMorgan set aside $808 million in reserves, Citi added $370 million to reserves and Wells increased the provision for credit losses by $385 million.
Still, shares of JPMorgan and Wells Fargo rallied strongly, up 2.5% and 3.7% respectively, while Citi gained 1.2% as the decline in earnings was not as deep as expected.
JPM also said it hoped to be able to resume share buybacks early next year, although other banks were less optimistic, with Citi saying buybacks continued to be suspended and Wells Fargo saying that it continued to be cautious about redemptions.
“JPMorgan delivered a strong set of results, top to bottom,” Credit Suisse analyst Susan Roth Katzke wrote in a note. “At least equally important is evidence of preparedness to handle whatever twist the macro takes; expect the latter to be front and center.”
JPMorgan reported a 17% drop in third-quarter profit to $9.74 billion, although that was less than feared. Wells Fargo posted a 31% decline to $3.53 billion, but it also beat expectations. And Citi reported a 25% drop to $3.5 billion, which also beat expectations.
“Most of these banks are making more spread revenue than ever before because of the change in interest rates,” said Chris Marinac, director of research at Janney Montgomery Scott. “And that was the first quarter where you had the full effect of the Fed, because the Fed went up a bit in May.”
JPMorgan said net interest income rose 34% to a record $17.6 billion, up 34%.
“In general, banks obviously seem to be benefiting from a higher rate environment, and we’ve clearly seen banks able to gain, revenue-wise, on higher interest rates,” said Eric Theoret, strategist. global macroeconomics at Manulife Investment Management.
Marinac said investors would want to see banks build up reserves at this point in the business cycle.
“They’re bracing for a hard landing as they build up the reserves,” Marinac said. “But that’s not necessarily a bad thing.”
While a number of banks managed to beat expectations, Morgan Stanley reported a 30% drop in profits to $2.49 billion, which missed estimates. Its shares fell 5%.
Morgan Stanley’s earnings showed investment banking revenue more than halved to $1.3 billion, with declines in the consulting, equity and fixed income segments of the bank.
James Gorman, chairman and chief executive of Morgan Stanley, said his company’s performance was “resilient and balanced in an uncertain and challenging environment.”
Corporate interest in mergers, acquisitions and IPOs has dried up, particularly affecting banks strong in investment banking. Global mergers and acquisitions lost ground in the third quarter as volumes in the United States fell nearly 63% as the rising cost of debt forced companies to postpone large takeovers.
While banks were optimistic about their ability to weather the likely tougher economy ahead, some observers worried about long-term growth prospects.
“Against the backdrop of economic headwinds, this morning’s strong earnings reports will quickly pass through the rear-view mirror,” said Peter Torrente, country head of banking and capital markets at KPMG in the United States. “Concerns over inflation, which shows little sign of slowing down, cast a shadow over the outlook.”
Torrente said that while bank revenues reflect the benefits of higher interest rates and continued demand for loans, the accumulation of loan loss provisions also reflects uncertainty on the road ahead.
“The next quarter and beyond, credit risk, loan growth and deposit balances will be key areas to watch in the banking industry,” Torrente said.
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Reporting by Saeed Azhar and Lananh Nguyen and Davide Barbuscia in New York, Noor Zainab Hussain, Niket Nishant, Mehnaz Yasmin, Sweta Singh and Manya Saini in Bengaluru Writing by Megan Davies Editing by Lananh Nguyen, Mark Potter, David Gregorio and Chizu Nomiyama
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