Inflation and geopolitical jitters impact the big U.S. banks but they managed to beat earnings targets.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. managed to beat Wall Street's reduced expectations for their fourth-quarter profits as higher interest rates boosted income from loans.
The banks turned in stronger-than-expected results despite a slowdown in overall deal activity such as home mortgage loans and initial public offerings.
But J.P. Morgan stock lost ground after CEO Jamie Dimon warned of economic uncertainty as central banks execute plans to hike interest rates, even as consumers continue to spend and businesses remain healthy.
Shares of JPMorgan Chase, Citi and Bank of America all fell over 1% in morning trades while Wells Fargo Slipped over 4%.
"We still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher, and the unprecedented quantitative tightening," Dimon said.
The bank also disclosed its first forecast for 2023 net interest income of $74 billion excluding its markets unit, which is below the latest Wall Street estimate of $75.2 billion.
On a call with reporters, JPMorgan CFO James Barnum said the bank's net interest income projection is "conservative" given macroeconomic uncertainties.
CEO Dimon said, "We don't know the future," given the global geopolitical environment.
"These uncertainties are real," Dimon said. "We hope they go away but they may not."
JPMorgan Chase $(JPM)$ said its fourth-quarter profit rose to $11.01 billion, or $3.57 a share, from $10.4 billion, or $3.33 per share, in the year-ago quarter. Net revenue increased to $35.57 billion from $30.35 billion in the year-ago quarter.
JPMorgan Chase beat the Wall Street earnings estimates of $3.08 a share and revenue of $34.35 billion, according to data compiled by FactSet.
Analysts have been reducing their profit forecasts for JP Morgan in the days leading up to its fourth-quarter results with the latest estimate of $3.08 a share, down from $3.15 a share on Dec. 30, according to FactSet data. But the bank still topped the more bullish forecast of $3.15.
Peter Torrente, KPMG U.S. national sector leader for banking and capital markets, said the earnings from JPMorgan and other big bankers were solid, with results driven by profit from loans, which the banks report as net interest income.
Credit reserves increased significantly over the past y ear and investment banking fees remained impact on the lackluster deal-making environment.
"Much like the last quarter, the magnifying glass for the industry continues to hover on the macroeconomic outlook for 2023 focusing on credit losses, loan demand and deposits as trailing indicators of turbulence," Torrente said.
Bank of America $(BAC.SI)$ stock fell 1.4% after the financial firm beat its earnings and revenue targets as it benefitted from higher interest rates on its loans.
Bank of America said it earned $7.1 billion, or 85 cents a share in the fourth quarter, compared to $7 billion, or 82 cents a share, in the year-ago quarter. Revenue, net of interest expense, increased by 11% to $24.5 billion.
Wall Street analysts expected earnings of 77 cents a share on revenue of $24.17 billion, according to data compiled by FactSet.
Net interest income rose 29%, or $3.3 billion, to $14.7 billion, "driven by benefits from higher interest rates, including lower premium amortization expense, and solid loan growth," the bank said.
Wells Fargo & Co. $(WFC)$ stock dropped 3.7% after its fourth-quarter revenue missed expectations.
The bank said its fourth-quarter profit fell by about half to $2.59 billion, or 67 cents a share, from $5.47 billion, or $1.38 a share in the year-ago quarter. That's ahead of the analyst estimate of 60 cents a share.
Revenue declined 5.7% to $19.66 billion, against an analyst consensus of $19.99 billion.
Net interest income increased by 45% to $13.43 billion.
The bank said earlier this week that it was reducing the size of its home-mortgage business. It also said that consumer banking and lending loans increased 4% and commercial banking loans climbed 18%.
Wells Fargo also previously disclosed an impact of 70 cents a share from litigation and regulatory matters including a recent settlement with the Consumer Financial Protection Bureau.
Citigroup (C) stock fell 2.4% after the bank posted lower profit. Fourth-quarter net income fell to $2.5 billion, or $1.16, from $3.2 billion, or $1.46 a share, in the year-ago quarter. Analysts were looking for earnings of $1.14 a share, according to a survey by FactSet.
Revenue increased 6% to $18.0 billion, slightly above the analyst estimate of $17.96 billion.
Excluding divestments, revenue rose 5%, as the impacts of higher interest rates across businesses and the strong loan growth in U.S. personal banking were partially offset by a decline in investment banking and lower investment product revenue in global wealth management as well as impacts from the exited markets.
Ahead of bank earnings, analysts at Keefe, Bruyette & Woods said they expect strong net interest income growth from the big banks as higher interest rates allow them to charge more to lend money. At the same time, activity has been weak in investment banking and mortgage lending.
Overall, however, U.S. consumers remain have relatively low unemployment numbers despite an increase in layoffs of late.
With the earnings from the big banks, Wall Street is looking for clues on the health of the economy and the impact of higher interest rates and inflation.
Shares of the big banks have been moving up in 2023 but are still well below year-ago levels.
As of Thursday's close, JPMorgan stock has risen 4% in 2023 but it's down 16.7% in the 12 months. The Dow Jones Industrial Average is now up 3.2% for the year, and down by 5.7% over the past 12 months, while the S&P 500 rose 3.7% in 2023 while falling 15.5% in the past 12 months.
Bank of America stock is up 4.1% for 2023 and down by 30% in the past year. Wells Fargo stock has risen 3.7% in 2023 and lost 23.6% in the past year. Citigroup is up 8.5% so far in 2023 and is lower by 26.9% in the past year.
With potential competition for deposits from consumers, banks may have to pay out higher interest rates for account holder products such as CDs which could eat into margins.
Another key metric is asset quality, which is affected by the quality of the loan portfolio and the credit administration program. If these numbers start to weaken, it could offer more clues about a potential recession.
In an interview this week at the JPMorgan Healthcare Conference, JPMorgan CEO Dimon also unleashed some fresh barbs against cryptocurrencies and criticized the crypto-trading platform FTX, which filed for bankruptcy late last year.
The outspoken Dimon had warned against what he termed an economic hurricane in a widely quoted interview in June.
Dimon revisited the remarks on Tuesday in an interview on Fox Business.
"I shouldn't have ever used the word 'hurricane,'" Dimon said in the interview. "What I said was there were storm clouds which may mitigate. People said they didn't think it was a big deal, and I said no, those storm clouds could be a hurricane. And so I'm saying this stuff, I'm talking about ... it could be nothing [or] it could be bad, and I think we should understand, I'm not predicting one or the other."
Also this week, BlackRock Inc. $(BLK)$ added its name to the growing list of financial and other companies cutting jobs with plans to reduce its workforce for the first time since 2019.
Also Read: BlackRock cutting 500 jobs or less than 3% of workforce
On Tuesday, Goldman Sachs is forecast to report earnings of $5.56 a share on revenue of $10.76 billion and Morgan Stanley is expected to report a profit of $1.29 a share on revenue of $12.54 billion, according to the latest analyst estimates.
-Steve Gelsi
(END) Dow Jones Newswires
January 13, 2023 08:46 ET (13:46 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
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