Three of the largest US banks reported a surge in profits from charging more for loans, as the Federal Reserve’s series of interest rate rises fattened their bottom lines.
JPMorgan Chase, Citigroup and Wells Fargo collectively earned $49bn in net interest income in the second quarter, the difference between what the banks pay for deposits and earn from loans and other assets.
The figure was 30 per cent higher than the same period last year and shows how certain lenders have been able to cash in since the Fed’s tightening began in March 2022.
While they charge more for loans, the biggest banks have managed to avoid paying much more to depositors. JPMorgan, the largest US bank, raised its forecast for full-year net interest income from $84bn to $87bn. Chief financial officer Jeremy Barnum credited higher rates “coupled with lower deposit reprice than previously assumed”.
JPMorgan’s deposits rose 1 per cent during the quarter to just shy of $2.4tn, boosted by its acquisition of failed regional lender First Republic in May. Barnum told analysts that the bank’s net interest income was not sustainable at the current high level and would eventually come down “as competition for deposits plays out”.
Jamie Dimon, chief executive, added that “there is no circumstance that we’ve ever seen in the history of banking” where competition did not intensify in a rising rate environment, either from other banks or alternative products such as money market funds. “We’re going to have to compete for that. You already see it in parts of our business and not in other parts.”
Not all US banks have benefited as much. While depositors have favoured the largest banks in a flight to quality, smaller banks have come under greater pressure to boost deposit rates, hurting their profit margins.
Custody bank State Street, whose clients skew towards bigger institutions who often chase better savings rates, warned on Friday it was having to pay higher interest rates to customers to retain deposits, causing its shares to fall 10 per cent.
The flipside to rising rates has been added pressure on borrowers across the economy, with worries about loan defaults, especially in commercial real estate. JPMorgan in the second quarter did also set aside a net $1.5bn in reserves to cover potential loan losses.
The bumper lending profits compensated for a fall in investment banking fees, which were down 6 per cent at $1.56bn for JPMorgan and 31 per cent lower at $686mn for Citi.
Citi chief executive Jane Fraser said “the long-awaited rebound in investment banking has yet to materialise, making for a disappointing quarter”.
Overall, JPMorgan said net income jumped 67 per cent year on year to almost $15bn, handily beating analysts’ estimates. Wells, the nation’s fourth-largest lender, said its profits increased more than 50 per cent from a year ago to nearly $5bn. Citi’s profits fell more than a third, hit by slower corporate spending, a dearth of deals and a costly round of lay-offs.
Wells told shareholders net interest income should rise about 14 per cent this year from 10 per cent previously, and Citi projected more than $46bn in net interest income, up from an earlier forecast of $45bn.
Rivals Bank of America and Morgan Stanley report results on Tuesday, while Goldman Sachs discloses earnings on Wednesday.