JPMorgan, Citi And Wells Fargo All Beat Wall Street’s Expectations, But Looming Credit Crunch Could Burst Bubble

Key takeaways

• All three banks that posted Q1 earnings today – JPMorgan, Citi and Wells Fargo – surpassed investor expectations
• Shares in most major banking sector companies have risen as a result
• The sector is on safer ground, but looming credit crunch fears haven’t disappeared

Finally, some good news. JPMorgan, Citi and Wells Fargo all kicked off Q1 earnings reports season with better-than-expected results, which beat Wall Street’s estimates.

JPMorgan posted a huge 52% earning increase, Citi made $4.6 billion in profit and Wells Fargo saw a 30% increase in net income. While each CEO touted their company’s strong and stable foundations, persistently conflicting economic data leaves the Fed leaning towards an interest rate increase – which could cause further instability in the market.

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A recap on the banking crisis

Silicon Valley Bank was the second-largest bank failure in U.S. history – and the quickest, thanks to digital payments. After a WhatsApp group started to panic from news about some bad SVB investments, the fire soon spread on social media and $42 billion was withdrawn before the bank, which was a favorite with start-ups, collapsed. Signature Bank soon followed and the panic spread to Switzerland, felling central bank Credit Suisse.

Meanwhile regional bank First Republic, which lent to a similar client base to SVB, was also on shaky ground. Its shares plummeted in value by up to 65% as news spread that it could be the third bank to fail in less than a week. This was soon stemmed with a $30 billion cash injection from 11 central banks, but as of this week the stock price is yet to recover.

So, as you can imagine, there was a lot riding on today’s earnings reports to see if things were genuinely dire or if the banking sector was as solid as its heads were saying. Thankfully, it doesn’t look like there’s reason to panic.

The latest banking results

JPMorgan has reported a massive 52% jump in earnings in the first quarter, with a net income of $12.6 billion in Q1 compared to $8.28 billion in the same period last year. That translates to $4.10 a share, which toppled analyst forecasts of $3.41. Credit card sales were up 10%, and card loans increased by over a fifth (21%).

Jamie Dimon, chairman and CEO of the bank, said it was down to years of “vigilant risk and controls framework” that has led to the results despite the turmoil, calling JPMorgan “a pillar of strength in the banking system”. It’s had a particularly strong quarter thanks to the rise in interest rates.

Citigroup also had reason to celebrate, beating Wall Street expectations. It made a profit of $4.6 billion in Q1 or $2.19 a share, boosted by its India-based consumer banking business. A highlight from the results was its working capital and payments service for companies, which jumped up 31% in revenue compared to last year.

CEO Jane Fraser said “Citi delivered strong operating performance, showing good revenue growth and expense discipline despite the tumultuous environment for banks”. During the crisis she was quick to say confidence in the banking system was still strong and that it was a “nip in the bud” situation rather than a full banking crisis.

Finally, Wells Fargo’s earning report was a three-peat for the sector with a 30% increase in net income to hit close to $5 billion, while its net interest income shot up by 45% thanks to higher interest rates.

Wells Fargo CEO, Charlie Scharf, said Wells Fargo’s “continued focus on financial and credit risk management [allows] us to support our customers throughout economic cycles”. The bank recently made a strategic move away from mortgage lending, laying off hundreds of bankers earlier this year.

What was the market’s reaction?

JPMorgan’s share price leapt 5.8% before the markets opened on Friday and has now climbed to over 7%, while Wells Fargo was up 2.2% in pre-trading but has slipped back to its previous level. Citibank was up 2% in pre-trading on Friday and is now hovering at a 3.3% gain, having already enjoyed a 4.5% boost to its share price this year.

The good news has had a knock-on effect with other central banks: Goldman Sachs is up 1.2% in trading hours and Morgan Stanley has seen a 1% boost in the share price.

Is the worst of the banking crisis over?

These results show the short-term risks from SVB, Signature Bank and Credit Suisse collapsing haven’t shaken the other banks, but that doesn’t mean more bank failures aren’t on the way.

Warren Buffett said earlier this week he predicted more banks would fail because banks sometimes make “dumb” decisions and “get a little bit bigger spread on record, a little more than earnings”. While the message sounds bleak, he was confident nobody would ever lose money deposited in a bank thanks to a federal protection scheme.

A key factor will be whether interests go up and how inflation reacts. Fed governor Christopher Waller said today that the financial conditions were still too tight to ease interest rates yet, stating “inflation is far above target, so monetary policy needs to be tightened further”. If that’s the case, we could see more financial institutions start to unravel.

The data continues to paint a baffling picture. While core CPI inflation came in on track this week and unemployment claims are rising, retail sales dropped 1% in March and U.S. consumer confidence has risen.

Dimon predicted a slowdown in consumer spending as “financial conditions will likely tighten as lenders become more conservative”. JPMorgan has set out $2.3 billion in the last quarter to cover credit defaults, while Wells Fargo has put aside $1.2 billion.

The bottom line

It’s a happy end to the week for the banking sector, which has suffered a volatile stretch. Things still aren’t settled, especially with more potential interest rate rises on the way, but the picture is looking far from any 2008-style crisis as it stands.

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