Large US banks report higher profits despite recent industry turmoil

JPMorgan Chase reported a jump in first-quarter profits Friday alongside fellow banking giants Citigroup and Wells Fargo, in reassuring news to investors after recent banking sector turmoil sparked contagion fears.

The first substantial look at the sector – since last month's collapse of Silicon Valley Bank and two other midsized banks – showed large banks are still benefiting in some ways from the Federal Reserve's shift towards higher interest rates and from a still-healthy US consumer.

But JPMorgan's better-than-expected results came as it warned again of a potential economic downturn while adding US$1.1 billion (RM4.84 billion) in reserves in case of bad loans.

Both Citigroup and Wells Fargo also added reserves in light of the uncertain backdrop, with the latter pointing to commercial real estate – broadly seen as a vulnerable area in finance.

Friday's results significantly boosted shares of JPMorgan and Citi, but several midsized banks declined in trading.

These banks, including First Republic, Zions Bancorporation and Comerica, which have been seen as more at-risk, are scheduled to report results later this month.

Big profit 

JPMorgan, the biggest US lender in terms of assets, reported a 52% surge in profits to US$12.6 billion. This was boosted by record revenues of US$38.3 billion, up 25% from the year-ago level.

But the additional reserves were taken due to "a deterioration in the weighted-average economic outlook" and "an increased probability of a moderate recession due to tightening financial conditions," the bank said in an earnings release.

Chief executive Jamie Dimon, speaking on a conference call with reporters, said US consumers remain "rather healthy," but that the economy faced challenges.

These include lingering inflation, the Fed's tightening policies and fallout from war in Ukraine.

"We're going to eventually have a recession, but that may be pushed off for a little bit," Dimon said.

JPMorgan's results were boosted by much higher net interest income (NII), as the major US bank benefited from a rising interest rate environment that enabled it to charge more for loans.

Recent banking industry turmoil following the collapse of SVB raised worries about a flight of deposits, but that was seen as more of a concern for midsized lenders.

JPMorgan Chase reported a drop in deposits compared with the year-ago period, but an uptick from the prior quarter.

In fact, JPMorgan sharply increased its 2023 forecast for NII to a total of US$81 billion, up US$7 billion from its prior forecast.

Chief financial officer Jeremy Barnum said this outlook partly reflected expectations on Fed policy, including talk of an interest rate cut later this year that removed "a little bit of pressure" on banks to raise interest to depositors.

Executives underscored, however, that they expect lower NII in 2024 and beyond.

In the news release, Dimon added that the US economy remained on "generally healthy footing" but the banking industry turmoil added to economic headwinds.

"The banking situation is distinct from 2008 as it has involved far fewer financial players and fewer issues that need to be resolved, but financial conditions will likely tighten as lenders become more conservative, and we do not know if this will slow consumer spending," he said.

More reserves 

Meanwhile, Citigroup reported profits of US$4.6 billion, up 7% from the year-ago period on a 12% rise in revenues to US$21.4 billion.

Citi scored higher NII and saw an uptick in average deposits.

But it set aside US$241 million in reserves, pointing to "macroeconomic deterioration" among other factors.

Chief financial officer Mark Mason said the non-payment rate on loans had ticked up, but remained below typical levels and is expected to "normalise."

The bank sees a somewhat higher chance for a recession that "is likely to be mild," Mason said, adding it is prepared for how the situation may evolve.

At Wells Fargo, profits came in at US$5.0 billion, up 31.8% on revenues of US$20.7 billion. The revenues were 16.9% higher from a year ago.

Wells has seen delinquencies and loan charge-offs continue to "slowly increase, as expected," said chief executive Charlie Scharf.

The bank added US$643 million in reserves, "reflecting an increase for commercial real estate loans, primarily office loans, as well as an increase for credit card and auto loans," according to its earnings release.

Shares of JPMorgan surged 7.6% to US$138.73, while Citi gained 4.8% to US$49.56 and Wells Fargo dipped 0.1% to US$39.64.