Banking results reveal sharp divide as industry recovers from turmoil

Profits at JPMorgan Chase (JPM) and Wells Fargo (WFC) jumped in the second quarter while falling sharply at Citigroup (C), demonstrating a fracture in the way the banking world is doing as it recovers from a period of extreme turbulence.

JPMorgan and Wells Fargo have shown that some giants can continue to make big money from consumer loans even as industry filing costs rise, while leveraging their sprawling franchises to generate additional revenue.

What Citigroup has revealed is that a number of issues continue to plague even the largest institutions, especially those that rely heavily on trading and trading.

Citigroup’s profit fell 36% in the second quarter, largely due to weaknesses in its Wall Street unit.

Other banks reporting next week, such as Goldman Sachs (GS) and Morgan Stanley (MS), could face similar challenges.

“The long-awaited rebound in investment banking has yet to materialize, making for a disappointing quarter,” said Citigroup CEO Jane Fraser.

JPMorgan and Wells were up slightly in morning trading, while Citigroup was down.

Citigroup CEO Jane Fraser testifies during an annual Wall Street oversight hearing of the Senate Banking Committee, Thursday, Sept. 22, 2022, on Capitol Hill in Washington.  (AP Photo/Jacquelyn Martin)

Jane Fraser, CEO of Citigroup. (AP Photo/Jacquelyn Martin)

A warning for small banks

There was also a new warning Friday for small banks. This came from State Street (STT), which was the 12th tallest in the country as of March 31.

In its second-quarter results, State Street revealed that its net interest income, which measures the difference between what it earns on loans and what it pays out in deposits, fell 10% from the first. quarter.

This is largely due to rising deposit rates and customer turnover of non-interest bearing deposits as they seek higher returns. The bank now expects net interest income to fall 12% to 18% in the next quarter.

“What we’ve seen is that our larger customers, and we have mostly large sophisticated customers, are quite active in thinking about their alternatives and…that’s been accelerated by the speed of this cycle and the ‘where we’ve come and how fast,’ said Eric Aboaf, chief financial officer of State Street.

Some other midsize banks reporting results in the coming weeks have already lowered their expectations of how much of that income they can earn, including executives from US Bancorp (USB), Citizens Financial Group (CFG ), Comerica (CMA), Huntington (HBAN), KeyCorp (KEY) and Zions (ZION).

State Street stock was down 10% on Friday morning.

Navigate the chaos

The results kicked off a closely watched earnings season where banks of all sizes will try to show they have recovered from one of the industry’s most tumultuous times since the 2008 financial crisis.

JPMorgan demonstrated its grip on the rest of the industry during the spring chaos by winning a government-sponsored auction to buy the bulk of First Republic operations after regulators seized the San Francisco lender.

First Republic was one of three major regional banks to fail, along with Silicon Valley Bank and Signature Bank. Their seizures triggered a panic in the banking system and outflows of depositors from a number of smaller banks.

The deal lifted JPMorgan’s second-quarter numbers. He said First Republic added $2.4 billion to its net profit. That helped lift overall profit to $14.5 billion, up 67% from the same period a year ago. Wells Fargo’s profit of $4.9 billion rose 57%.

Troubles on Wall Street

The industry is no longer at the same level of crisis as it was in the spring, but the second quarter results of some of the largest banks are a reminder that the industry still faces a number of challenges on several fronts.

Citigroup, for example, has struggled with a recent deal crunch that is making daily life more difficult for all of Wall Street. Its investment banking revenue fell 24% to $612 million. Trade was another weakness. Revenue from this activity fell by 13%.

Citigroup and other companies with large investment banking and trading units have made or announced cuts of around 12,000 jobs since the end of 2022. Deals dry up amid rising interest rates and economic uncertainty.

Even JPMorgan had challenges on this front. Its investment banking fees fell 6% from a year ago to $1.5 billion. Its trading income on equities and fixed income also declined.

“Things are going better than people expected”

What JPMorgan, Wells and Citigroup had in common on Friday was that they set aside more money to cover future loan losses, a sign that they expect the economy to slow during of the next quarters.

Many other banks are also expected to do the same when they release their second quarter results.

Wells Fargo made $1.71 billion in provisions for credit losses in the second quarter, up from $580 million a year ago. This included an increase of $949 million primarily for commercial real estate loans.

“I think things are going better than people expected at this point in the cycle,” Wells Fargo chief financial officer Mike Santomassimo said. “We expect them to be weaker in the [commercial real estate] market and it will take some time to materialize. It’s going to be a while before we see, you know, the end of the end of it all.”

CEO Charlie Scharf said the US economy “continues to be resilient.”

JP Morgan CEO Jamie Dimon speaks during the Boston College Chief Executives Club luncheon in Boston, Massachusetts, U.S., November 23, 2021. REUTERS/Brian Snyder

JPMorgan CEO Jamie Dimon. REUTERS/Brian Snyder

JPMorgan CEO Jamie Dimon was also optimistic about the US economy, saying it “continues to be resilient” and that “consumers are spending, albeit a bit slower.”

Its chief financial officer, Jeremy Barnum, told reporters that the bank does not expect many loan applications, except for credit cards and automobiles. But “we don’t particularly expect any tightening other than to the extent that individual borrowing credit metrics deteriorate.”

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