U.S. banking heavyweights reaped windfalls from higher interest payments in the first quarter, brushing off a sector shake-down and taking the opportunity to set aside billions of dollars in case loans turn sour as the economic outlook dims.
First-quarter 2023 earnings from JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. beat Wall Street expectations on Friday as consumer and corporate spending held up in the face of rate rises, although all three saw signs of a slowdown and made provisions accordingly.
"Goliath is Winning," Wells Fargo analyst Mike Mayo said in a note highlighting growth, scale and resiliency in a "uniquely strong quarter" for JPMorgan, which he called "a port in the storm" during recent banking sector tumult.
Banks are building up rainy day funds as fears of an economic slowdown mount from the U.S. Federal Reserve's aggressive interest rate hikes to tame inflation as well as the recent turmoil fueled by the failures of two mid-sized banks.
JPMorgan Chief Executive Jamie Dimon warned that while the U.S economy remains robust, the recent crisis in banking with the sudden collapse of Silicon Valley Bank (SVB) and Signature Bank last month could make lenders more conservative and at the same time impact consumer spending.
'Storm Clouds Remain on the Horizon'
"The storm clouds that we have been monitoring for the past year remain on the horizon, and the banking industry turmoil adds to these risks," Dimon said.
One area where it proved harder for the big banks to profit in 2023 has been investment banking, which was reflected in JPMorgan's business with a 24% fall in revenue at the unit.
Global mergers and acquisitions (M&A) activity shrank to its lowest level in more than a decade in the first quarter, as rising interest rates, high inflation and fears of a recession soured the appetite for dealmaking.
M&A volumes during the first quarter slumped 48% to $575.1 billion as of March 30, compared to $1.1 trillion during the same period last year, according to data from Dealogic.
JPMorgan Profit Surges 52%
JPMorgan beat market expectations with a 52% rise in profit to $12.62 billion, or $4.10 per share, in the three months to the end of March, while its loan loss provisions increased by 56% from last year to $2.3 billion. Net interest income, a measure of how much a bank earns from lending, surged 49% to $20.8 billion.
Citigroup also beat Wall Street forecasts, helped by the effects of the Fed's tighter monetary policy as well, while setting aside $241 million to cover potential loan losses compared to a reserve release of $138 million a year ago.
Meanwhile, Wells Fargo set aside $1.21 billion in the quarter to cover for potential loan losses, compared to a release of $787 million a year earlier.
Wells Fargo said its provision included a $643 million rise in the allowance for credit losses, reflecting an increase for commercial real estate lending, primarily office loans, as well as an increase for credit card and auto loans.
Consumers Breaking Down
"While most consumers remain resilient, we've seen some consumer financial health trends gradually weakening from a year ago," Mike Santomassimo, Wells Fargo finance chief, told analysts. The company is taking action "to position the portfolio for a slowing economy," he said.
Meanwhile, PNC Financial Services Group reported an 18.5% rise in first-quarter profit, as the Fed's rate hikes fueled a surge in the U.S. regional lender's net interest income (NII).
And in another key part of the financial services sector, BlackRock Inc. reported an 18% drop in first-quarter profit but beat analysts' estimates as investors continued to pour money into its funds, cushioning the hit to fee income from the banking rout that rocked global markets.
New York-based BlackRock, the world's largest asset manager which makes most of its money from fees on investment advisory and administration services, ended the first quarter with $9.1 trillion in assets under management, down from $9.57 trillion a year earlier but up from $8.59 trillion in the fourth quarter.
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