Wall Street Bank Earnings Fall As Economic Clouds Approach, Some Beat Expectations

(Reuters) – Profits at Wall Street’s biggest banks slumped in the third quarter as they prepared for a weaker economy while investment banking was hit hard, but investors saw the upside with some banks beating estimates.

JPMorgan Chase & Co (JPM.N)Morgan Stanley (MS.N)Citigroup Inc (CN) Wells Fargo & Co (WFC.N) It showed a drop in net income after turbulent markets choked off investment banking and lenders set aside more rainy-day money to cover losses from delinquent borrowers.

“We’re in an environment where it’s kind of weird,” said Jamie Dimon, chief executive of JPMorgan, who said that while the bank had hoped for the best, we always remained vigilant and prepared for bad outcomes.

Central banks around the world are struggling with rising inflation that is expected to cause an economic slowdown. The Federal Reserve raised its benchmark interest rate from near zero in March to the current range of 3.00% to 3.25% and indicated further increases.

Higher rates tend to boost bank profits, but the broader risk of economic downturn from rising inflation, supply chain bottlenecks and the war in Ukraine could affect future earnings.

On a conference call, Dimon said US consumers remained strong and he wasn’t expecting a recession but “there are a lot of headwinds out there.”

He warned that the money people have in their checking accounts “will likely be exhausted by the middle of next year” as they face headwinds such as inflation, high interest rates and high mortgage rates.

Banks are allocating more money in preparation for a blow from a possible economic slowdown. JPMorgan allocated $808 million in reserves, Citi added $370 million to reserves, and Wells received a $385 million increase in provision for credit losses.

However, JPMorgan and Wells Fargo shares rose strongly, rising 2.5% and 3.7% respectively while Citi shares rose 1.2% as the earnings drop was not as deep as feared.

JPM also said it hopes to be able to resume share buybacks early next year, although other banks were less optimistic as Citi said buybacks were still pending and Wells Fargo said it remained cautious about repurchases. repurchase.

“JPMorgan delivered a robust set of results, from top to bottom,” Susan Ruth Katzky, an analyst at Credit Suisse, wrote in a note. “At least as important is evidence of management’s preparedness through whatever turn the macroeconomics takes; expect the latter to be in focus.”

JPMorgan reported a 17% drop in third-quarter profit to $9.74 billion, although this was lower than expected. Wells Fargo posted a 31% drop to $3.53 billion but also beat expectations. Citi reported a 25% drop to $3.5 billion which also beat expectations.

“Most of these banks are generating more income than ever before because of the change in interest rates,” said Chris Marinac, director of research at Janie Montgomery Scott. “And that was the first quarter where you had the full impact of the Fed, because the Fed increased quite a bit in May.”

JPMorgan said net interest income rose 34% to a record $17.6 billion, up 34%.

“Overall it appears that banks are benefiting from a higher rate environment, and clearly we have seen that banks are able to earn, in terms of revenue, at higher interest rates,” said Eric Theoret, global macroeconomic analyst at Manulife Investment Management.

Marinac said investors will want to see banks build reserves at this point in the economic cycle.

“They are preparing for a hard landing, because they are building reserves,” said Marinac. “But that’s not necessarily a bad thing.”

While a number of banks managed to beat expectations, Morgan Stanley announced a 30% drop in profit to $2.49 billion, which did not deviate from estimates. Its shares fell 5%.

Morgan Stanley earnings showed investment banking revenue more than halved to $1.3 billion with declines across the bank’s advisory, equity and fixed income sectors.

James Gorman, Morgan Stanley’s chairman and CEO, said his company’s performance was “resilient and balanced in an unstable and challenging environment.”

Corporate interest in mergers and acquisitions and initial public offerings has faded, particularly hitting banks hard in investment banking. Global mergers and acquisitions slumped in the third quarter with volumes in the US down nearly 63% as the rising cost of debt forced companies to put off big acquisitions.

And while banks were optimistic that they might beat a potentially tougher economy ahead, some observers were concerned about the long-term outlook for growth.

“Against the backdrop of economic headwinds, strong earnings reports from this morning will quickly move into the rearview mirror,” said Peter Torrente, KPMG’s US National Head of Banking and Capital Markets. Inflation fears, which are showing few signs of slowing. down, casting a shadow on future prospects.”

Torrente said that while bank revenue reflects the benefit of higher interest rates and continued demand for loans, the accumulation of loan loss provisions also reflects the uncertainty in the road ahead.

“In the next quarter and beyond, credit risk, loan growth and deposit balances will be key areas to watch in the banking industry,” Torrente said.

Additional reporting by Saeed Azhar, Lanan Nguyen and Davidi Barbuchia in New York, Noor Zainab Hussain, Nikit Nishant, Mehnaz Yasmin, Sweta Singh and Manya Saini in Bengaluru Writing by Megan Davis Editing by Lanana Nguyen, Mark Potter, David Gregorio and Chizu Nomiyama

Our criteria: Thomson Reuters Trust Principles.