The biggest U.S. banks presented a picture of a resilient economy on Friday, with consumers and businesses continuing to spend and borrow even after a lightning-fast rise in interest rates.
JPMorgan Chase's profit soared 67% in the second quarter from a year earlier and Wells Fargo's jumped 57%, lifted by the income they earned lending out money at higher rates. Citigroup's net interest income was a bright spot, though profit fell 36%. All three banks beat analysts' expectations for profit and revenue.
The three banks collectively grew their loan books from a year earlier, thanks partly to an increase in credit-card balances, which padded revenues. The banks lifted their forecasts for their 2023 lending profits, proof they don't expect to see a major shift in borrowing or deposits.
Analysts and investors largely agree that the economy has been slowing since the Federal Reserve began lifting rates last year. Still, Friday's results made it easy to forget there was a banking crisis this year.
The higher interest rates that pushed Silicon Valley Bank, Signature Bank and First Republic Bank to failure have largely been a benefit for the megabanks, which all attracted customers reaching for safety. JPMorgan's purchase of First Republic, with government aid, boosted its consumer and commercial businesses and gave the bank an immediate $2.7 billion gain.
The picture could be less rosy for smaller and midsize lenders, which will start reporting results next week. While banks of all sizes are paying more in interest to keep yield-hungry customers from yanking their deposits, the extra expense can be hard on smaller banks.
Bank stocks have diverged this year. JPMorgan, Wells Fargo and Citi are all up in 2023. Friday, JPMorgan rose 0.6%, while Wells Fargo fell 0.3% and Citigroup dropped 4%. The broader KBW Nasdaq Bank Index is down 18% for the year and fell Friday, a sign that investors are worried about smaller banks' deposit costs.
Some regional banks have lowered their second-quarter earnings forecasts in recent weeks, saying they underestimated how much they would have to shell out on deposits.
While executives at all three big banks said they continue to believe the economy is strong, especially when looking at U.S. consumers, they all cautioned there is too much uncertainty to be sure of the future.
"I don't know whether it's going to be a soft landing, a mild recession or a hard recession," JPMorgan Chief Executive Jamie Dimon told reporters.
Loan defaults increased slightly but remain historically low. The big banks set aside some money for potential future defaults, particularly in commercial real estate, but the charges weren't as large as what they took when anticipating steep economic declines.
Bankers and regulators say that the March crisis has receded, and recent economic data has spurred hopes the worst-case economic scenarios they feared won't materialize.
The optimism is showing up in markets too, with investors embracing risk-on trades they had avoided for much of 2022. Megacap tech stocks are up, with the Nasdaq Composite just wrapping up its best first half to a year since the 1980s. Bitcoin rose more than 80% in the first half of the year, even though regulators sued the biggest crypto exchanges.
"The U.S. economy continues to perform better than many expected and although there will likely be continued economic slowing and uncertainty remains, it is quite possible the range of scenarios will narrow over the next few quarters," Wells Fargo CEO Charlie Scharf said on a call with analysts.
JPMorgan, Wells Fargo and Citi together earned $49 billion in net interest income last quarter, up 31% from a year earlier, as loans increased and they charged more for them.
Customers at all three banks spent more on their credit cards, and more borrowers carried over balances each month. Loans to businesses were up at JPMorgan and Wells Fargo.
Even mortgage originations, which are heavily impacted by rates, increased from earlier in the year at Wells and JPMorgan, though they remained down sharply from a year ago.
"Overall, I'd say we are seeing a more cautious consumer, but not necessarily a recessionary one," Citi CEO Jane Fraser said.
But the going is getting tougher even for the big banks.
All three banks had to pay more to depositors to keep them from moving money into higher-yielding money-market funds, after years of paying next to nothing on consumer checking accounts.
And customers still pulled money. Deposits fell 3% from a year earlier at JPMorgan and 6% at Wells Fargo. They were roughly flat at Citi.
Those results spooked investors across the banking sector, where smaller and less-diversified banks have a harder time offsetting those costs. Regional banks slumped Friday and custody banks State Street and Bank of New York Mellon dropped sharply.
Meanwhile, loans might sour as well if higher rates take a bigger toll on consumers and businesses.
"We're still very early in the cycle. This is going to play out over an extended period," said Mike Santomassimo, Wells Fargo's chief financial officer, on a call with reporters. The bank set aside nearly $1 billion to cover expected bad loans, largely in commercial real estate.
JPMorgan executives characterized the slight increase in loan defaults as more historically normal, not a concerning deterioration.
Banks also are becoming more selective about the loans they make. "The economy has slowed, and we've taken some credit tightening actions," Scharf said on the analyst call.
Wall Street businesses remained in the doldrums. Investment banking, which includes fees from mergers and selling corporate stock and debt, fell 6% from a year earlier at JPMorgan and 24% at Citi. Trading declined 10% at JPMorgan and 13% at Citi.
"People should feel that the economy is on a pretty solid footing, which is surprising given the pace of interest rate hikes," said Jean Rosenbaum, senior portfolio manager at GYL Financial Synergies.