Profits slid at Wall Street's biggest banks in the third quarter as they braced for a weaker economy while investment banking was hit hard, but investors saw a silver lining with some banks beating estimates.
JPMorgan Chase & Co, Morgan Stanley, Citigroup Inc and Wells Fargo & Co showed a slide in net income after turbulent markets choked off investment banking activity and lenders set aside more rainy-day funds to cover losses from borrowers who fall behind on payments.
"We're in an environment where it's kind of odd," said JPMorgan Chief Executive Officer Jamie Dimon, who said that while the bank was "hoping for the best, we always remain vigilant and are prepared for bad outcomes."
Central banks globally have been battling surging inflation which is expected to cause an economic slowdown. The Federal Reserve has raised the benchmark interest rate from near zero in March to the current range of 3-3.25 percent and signaled more increases.
Rising rates tend to buoy bank profits, but the broader risk of an economic downturn sparked by high inflation, supply-chain bottlenecks and the war in Ukraine could weigh on future earnings.
On a conference call, Dimon said US consumers remained strong and he wasn't predicting a recession but "there are a lot of headwinds out there."
Money that people have in their checking accounts will "deplete probably by sometime midyear next year" while they are contending with headwinds like inflation, higher rates and higher mortgage rates, he cautioned.
Banks set aside more money in preparation for a hit from a potential economic slowdown. JPMorgan set aside $808 million in reserves, Citi added $370 million to reserves and Wells had a $385 million increase in the allowance for credit losses.
Still, shares of JPMorgan and Wells Fargo gained strongly, up 2.5 percent and 3.7 percent respectively while Citi gained 1.2 percent as the profit falls were not as deep as feared.
JPM also said it hopes to be able to resume stock buybacks early next year, although other banks were less bullish with Citi saying buybacks continue to be on hold and Wells Fargo saying it continues to be prudent about buybacks.
"JPMorgan delivered a solid set of results, from top to bottom," Susan Roth Katzke, an analyst at Credit Suisse, wrote in a note. "At least equally as important is the evidence of preparedness to manage through whatever turn the macro takes; expect the latter to be in focus."
JPMorgan reported a 17 percent drop in third-quarter profit to $9.74 billion, although that was less than had been feared. Wells Fargo posted a 31 percent decline to $3.53 billion but it also beat expectations. And Citi reported a 25 percent drop to $3.5 billion which also beat expectations.
"Most of these banks are making more spread income now than ever because of the change in interest rates," said Chris Marinac, Director of Research at Janney Montgomery Scott. "And this was the first quarter where you had the full effect of the Fed, because the Fed increased a little bit in May."
JPMorgan said net interest income rose 34 percent to a record $17.6 billion, up 34 percent.
"Generally banks obviously seem to be benefiting from a higher rate environment, and we've obviously seen banks able to earn, in terms of revenues, on higher interest rates," said Eric Theoret, global macro strategist at Manulife Investment Management.
Marinac said investors would want to see banks build reserves at this point in the economic cycle. "They're bracing for a hard landing, because they're building the reserves," said Marinac. "But that's not necessarily a bad thing."
While a number of the banks managed to beat expectations, Morgan Stanley reported a 30 percent slump in profit to $2.49 billion which missed estimates. Its shares fell 5 percent.
Morgan Stanley's earnings showed that investment banking revenue more than halved to $1.3 billion with declines across the bank's advisory, equity and fixed income segments.
James Gorman, Chairman and Chief Executive Officer of Morgan Stanley, said his firm's performance was "resilient and balanced in an uncertain and difficult environment."
Corporations' interest in mergers, acquisitions and initial public offerings dried up, particularly hitting banks strong in investment banking. Global M&A lost ground in the third quarter with volumes in the United States plummeting nearly 63 percent as the rising cost of debt forced companies to postpone big buyouts.
While banks were optimistic they could weather the likely tougher economy ahead, some observers were concerned about the long term outlook for growth.
“Against the backdrop of economic headwinds, the solid earnings reports from this morning will quickly pass into the rearview mirror," said Peter Torrente, KPMG US National Sector Leader for Banking and Capital Markets. "Worries of inflation, which shows little sign of slowing down, are casting a long shadow on future outlook."
Torrente said while banks' revenues reflect the benefit of rising interest rates and persisting loan demand, the buildup in loan loss provisions also reflects the uncertainty in the road ahead.
"Next quarter and beyond, credit risk, loan growth, and deposit balances will be key areas to monitor in the banking industry," Torrente said.
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