U.S. banks point to resilient but slowing economy, flag risks ahead

New York, July 15 (BNA): Some of the largest US banks said on Friday that they got a boost in profits from higher interest rates and painted a picture of a resilient economy, with sparks of hope in some companies such as closing deals that were in the works. dumps lately.

But they also warned of risks ahead, with US consumers cutting back on spending and accumulating losses in areas such as credit cards and commercial office real estate, Reuters reported.

Investors brushed off their initial enthusiasm for results from JPMorgan Chase, Wells Fargo and Citigroup, fearing that things were about as good as they were going to get for a while.

“We’re in a very unusual environment – higher inflation, these rate levels, a strong job market,” said Jane Fraser, CEO of Citigroup. But, she added, “I don’t think we should be overly concerned here about the health of the American consumer.”

JPMorgan Chase and Wells Fargo both reported sharp increases in net interest income, which measures the difference between what banks earn on loans and deposit payments, driving up earnings.

But for Citigroup, gains in interest income have been overshadowed by weakness in its trading business. These are headwinds that other banks more reliant on Wall Street business, such as Goldman Sachs and Morgan Stanley, are likely to face when they report results next week.

Separately, BlackRock, the world’s largest asset manager, handily beat estimates for second-quarter earnings but showed a slowdown in fund flows.

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US custodial bank State Street Corp beat earnings estimates for the second quarter after interest income rose 18% year-over-year, although it fell 10% quarter-on-quarter due to lower average non-interest deposit balances.

State Street warned of a further 12-18% decline in net interest income on a sequential basis on its earnings call, driven by lower levels of deposits. Deposits at large banks have fallen as consumers move money around in search of higher returns.

State Street shares closed up 12%, while JPM shares rose 0.6%. Wells shares fell 0.3%, while Citi fell 4% and BlackRock fell 1.5%.

“If interest rates rise, loan demand may continue to deteriorate,” said Brian Mulberry, director of client portfolio at Zacks Investment Management.

The bank’s results provide the latest insights into the health of the US economy. Investors were concerned that an aggressive rate hike campaign by the US Federal Reserve to fight inflation would push the economy into recession but the outlook remains highly uncertain.

“The US economy remains resilient,” said Jamie Dimon, CEO of JPMorgan.

But, he added, consumers are “slowly running out of cash”.

Some bank executives said U.S. consumers, the main drivers of the economy, are still enjoying healthy finances, but they warned that spending was slowing, and there was a modest deterioration in some consumer debt.

Weekly data from the Federal Reserve showed a slowdown in consumer borrowing. Bank credit card lending saw its growth rate peak in October 2022 after two years of strong increases and has been declining since then. The main drawback to consumer lending is auto loans.

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Annual growth peaked there in early 2022 and turned negative in April.

Wells Fargo said consumer writedowns, that is, debt that a bank has written off and is not expected to be recovered, continued to deteriorate modestly. Citi noted that delinquency rates in credit cards and other retail lines are on the rise and are expected to reach “normal levels” by the end of the year.

Wells CEO Charlie Scharf said the range of scenarios for the economy should narrow over the next few quarters. For now, the economy is doing better than many expected, but it will likely continue to slow.

Larry Fink, CEO of BlackRock, said in an interview with CNBC that he expects the economic environment to remain difficult. “Inflation will be more persistent than the market assumes,” he said, adding that it would bounce back around 2% and 4%.

Meanwhile, the deposit levels of major banks have fallen for more than a year, and the annual growth rate turned negative last October and reached negative 6% in April, the largest drop ever.

JPMorgan said it expects a moderate downward trend in deposits.

Investment banking and trading companies, which have been a drag on earnings in recent quarters, have done it again. Some executives expressed hope, saying they saw early signs of recovery in parts of those companies but avoided calling it a turning point.

JPMorgan’s Barnum said the bank sees “green shoots” in trading and investment banking but it’s too early to call for a direction.

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JPMorgan and Wells Fargo also set aside more money for expected losses from commercial real estate loans, in the latest sign of growing tension in the sector.

Wells reported that the provision for credit losses included a $949 million increase in provisions, primarily for potential losses on Commercial Real Estate Office (CRE) loans, as well as higher credit card loan balances.

“While we haven’t seen significant losses in our desk portfolio yet, we do hold the weakness that we expect to see in that market over time,” Scharf said.

The three banks started earnings season. Bank of America and Morgan Stanley will report results on July 18, followed by Goldman Sachs on July 19.

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