Large U.S. banks kicked off the first-quarter earnings report season by disclosing higher-than-expected profits. But their net interest income—a key performance indicator for the sector—fell shy of projections.

Thanks primarily to surging revenue from investment banking and trading activities, JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) all surpassed consensus earnings projections from analysts surveyed by Visible Alpha.

However, net interest income at each declined from the fourth quarter. That's because interest rates that banks charge on loans may have risen with the Fed's rate hikes, but so have the banks' deposit costs—what they pay out on interest-bearing deposits.1234

At JPMorgan, the nation's largest bank, net interest income dropped 4% from the previous quarter, falling for the first time in 11 quarters. Net interest income for the first three months of this year also fell 4% at Wells Fargo and 6% at Citigroup compared the prior quarter.

Fed's No Longer Feeding Net Interest Income Growth

Because of low interest rates, U.S. banks for more than a decade struggled to earn much of a difference between what they charged for loans and paid on deposits. The Fed's interest rate increases to battle inflation in 2022-23 changed that equation, and net interest income rose.

Friday's first-quarter data, though, indicate those halcyon days for banks may have ended, even as persistent inflation, emphasized by JPMorgan Chief Executive Officer (CEO) Jamie Dimon in his comments accompanying the company's results, has dimmed the prospect of Fed rate cuts this year.5

Compared with the first quarter of 2023, net interest income increased 11% at JPMorgan, though its purchase of troubled First Republic Bank's assets last year accounted for most of the gain. Net interest income inched 1% higher at Citi compared with the same quarter a year ago but fell 8% at Wells Fargo.

Overall, JPMorgan's net income rose 6% compared with a year ago. But profits fell 8% at Wells Fargo and plunged 27% at Citi.

Boost from Investment Banking, Trading

Nonetheless, revenue and profit rose comfortably at all three banking giants from the fourth quarter.

Reflecting the resilience of the U.S. markets and economy, earnings benefited from surging investment banking and trading revenue. In addition, reduced provisions for credit losses signal that U.S. consumers remain in relatively decent financial shape.

Investment banking units struggled throughout much of last year amid a dearth of mergers and acquisitions (M&A). But as Moody's noted earlier this week, equity and bond issuance rose markedly in the fourth quarter, fueling a resurgence for large investment banks.6

The continuing rally in the U.S. stock market provided plentiful opportunities for banks' trading desks, and they took advantage.

At Citi, for example, revenue in its Markets division though lower compared with the year-ago quarter, rose 59% from the fourth quarter to almost $5.4 billion, and investment banking and corporate lending revenue surged 68% to $1.8 billion. Combined, those gains accounted for the bulk of the firm's overall revenue increase.

Corporate and investment banking revenue increased 24% more than the prior quarter at both JPMorgan and Wells Fargo, constituting the bulk of overall revenue gains at those companies, as well.35

Credit Goes to Consumers

Aiding profits for all three banks during the quarter: A decline in the amount of money they set aside for potential loan losses.

Concerns have increased that consumers have run out of cash as credit card balances rise. That also has heightened worries that loan defaults will increase. But it's not a concern the big banks imparted in their first-quarter results.

All three banks reduced their provisions for credit losses considerably in the first quarter on a sequential basis.

One potential sign that consumers might have started pulling back, appeared, though. Loan balances for all three banks fell slightly during the quarter as interest rates remain high. If that continues, banks may have to reduce loan rates to drum up demand. That, in turn, would place further downward pressure on net interest income.

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