JPMorgan and Other Banks Are Reporting Earnings. What They’re Signaling.

Wall Street was a little skeptical going into this earnings season. Analysts at Keefe, Bruyette & Woods forecast a 7% drop in earnings per share as banks contend with customers who face continued pressure from inflation as well as higher interest rates creating an unfavorable climate for deal making. So far, those fears have yet to materialize.

Banks have seen an increase in net charge offs—the portion of debt believed unlikely to be repaid—compared with the year-ago quarter. But executives said Friday levels were more consistent with the prepandemic economy than with a recessionary economy.

While there are still plenty of banks—large and small—to post financial results over the next two weeks, the early read for the sector has been positive.

JPMorgan notched a 67% jump in profit year-over-year, which was helped in part by its acquisition of troubled

First Republic Bank

in May. Wells Fargo saw its profit climb 57%.

Citigroup

(C) fared less well, posting a 36% drop in profit, but that was due more to a slump in deal making than troubled consumers. Its results still topped The Street’s expectations.

For now, all eyes are on net interest income and the three did well on that measure, earning a collective $49 billion. Rising rates have helped lenders as they are able to earn more interest on the loans they issue and have yet to face significant pressure to pay more interest to depositors. Accordingly, both JPMorgan and Wells Fargo lifted their forecasts for net interest income for the year.

But bank executives are mindful that savers won’t be complacent for much longer as they have already seen net interest margins compress quarter-over-quarter. At JPMorgan net interest margin ticked down to 2.62% from 2.63% while at Wells Fargo it fell to 3.09% from 3.2%.

“I think it’s safe to say there is very little pricing power in most of our business, and [deposit] betas are going to go up. You take it as a given,” Jamie Dimon, chief executive at JPMorgan said on a call with analysts Friday. 

Large banks like JPMorgan were perceived as havens during the regional banking turmoil this spring, which saw the collapse of Silicon Valley Bank,

Signature Bank
,
and First Republic. Savers were briefly willing to forego earning higher interest on their deposits for the peace of mind of having their savings in larger, more stable institutions. But since it now seems clear the banking issues were limited to a few problem institutions, banks have less pricing power.

But even though banks made it through the last three months unscathed, they are facing regulatory headwinds as the Federal Reserve wants them to hold even more capital to buffer them against a potential crisis. 

That means banks would have less capital for lending and to return for capital, resulting in a potential overhang for the sector. If banks find their lending ability constrained, customers will have to go to alternative sources of financing.

“This is great news for hedge funds, private equity, private credit, Apollo (APO), Blackstone (BX),” Dimon said Friday after being asked about Apollo’s shares recently hitting an record high. “They’re dancing in the streets.”

While bank investors may not have reason to dance, they also don’t have reason to worry.

Write to Carleton English at [email protected]