Big-Bank Profits May Be Higher, but for How Much Longer? | Mint

Big-Bank Profits May Be Higher, but for How Much Longer?

JPMorgan Chase anticipates intensified deposit competition with its peers sooner rather than later. PHOTO: MARISSA ALPER FOR THE WALL STREET JOURNAL
JPMorgan Chase anticipates intensified deposit competition with its peers sooner rather than later. PHOTO: MARISSA ALPER FOR THE WALL STREET JOURNAL

Summary

Despite banks continuing to see benefits of high rates, worries about deposit costs and consumer credit still lurk.

The most important banker in the country is warning that the good times for big banks in the U.S. may not last. Investors should listen.

Citigroup, JPMorgan Chase and Wells Fargo all reported profit growth and raised their outlooks for core net interest income this year, collectively by over $4 billion. While rising rates are pushing up lenders’ funding and deposit costs, banks are also earning a lot more on their cash and loans, particularly credit cards. In fact, the gap between the interest rate earned and the rate paid out actually widened in the third quarter from the prior period for Citigroup and JPMorgan. Shares of all three megabanks each were up sharply Friday.

Yet lurking behind the big numbers are the same concerns that have haunted bank stocks all year, despite some strong quarters from the leading lenders. The three banks’ net interest income forecasts also imply this key revenue figure will be lower in the fourth quarter than the third quarter.

Big banks have proven more resilient than small and medium-size ones to deposit pricing pressure. But given just how cheap deposits have been in recent years, there seems to be more room for repricing to occur, as customers acclimate to higher interest rates for a longer period.

While the biggest banks’ shares have outperformed the broader sector, they have all severely underperformed the S&P 500, with the notable exception of JPMorgan, which has posted gains similar to the index.

Yet even the biggest U.S. bank isn’t immune, by its own admission. JPMorgan Chief Executive Jamie Dimon told reporters and analysts on Friday that he still anticipates intensified deposit competition with his peers sooner rather than later, helping to pressure what he called the bank’s current “over-earning." It has even recently offered attractive deals—like a 6% certificate of deposit rate—to certain key customers.

On top of deposit concerns, there is the fact that these banks’ reported loan growth is pretty tepid right now, collectively less than 1% from the second to the third quarter. Credit-card loan growth has been the superstar in recent quarters. But bankers generally don’t expect spenders to keep up the pace: JPMorgan told analysts card growth will “probably be a little bit more muted" from here.

And that is before considering how the banks might decide not to hold on to certain loans, such as mortgages, ahead of the Federal Reserve’s proposed new capital rules. Without much loan growth, the pressure is squarely on interest rates to keep boosting lending income.

Likewise, while banks remain confident about Americans’ financial health generally, they are still expecting consumer credit to weaken—or “normalize," in their parlance—from the exceptional levels of the pandemic. Citigroup said that its net charge-off rates in credit cards would hit prepandemic levels by the end of the year, suggesting a jump from a loss rate of 2.72% in its branded card unit in the third quarter to a range of 3% to 3.25%. Those results wouldn’t be bad by any stretch. In fact, JPMorgan lowered its full-year 2023 credit-card net charge-off forecast from 2.6% to 2.5%. But they do imply that things won’t stay as rosy as they have been in the recent past.

On the wholesale side, Wells Fargo said it increased its set-asides for potential losses on commercial real estate office loans—though for giant banks, these are ultimately smaller parts of the overall business. Regional banks are typically relatively much more exposed.

The wild card, naturally, is whether the U.S. ends up in an economic downturn at some point in the next couple of years. For now, things look better on that front: With JPMorgan’s chief economist forecasting a diminishing likelihood of contraction, that helped the bank release some of its set-asides for loan losses, the bank said on Friday. But changing expectations could just as easily reverse that process.

Of course, economic weakness could prompt a rate cut by the Federal Reserve, easing pressure on deposit prices. But recession isn’t an outcome that would be kind to lenders overall. The path to the next peak for banks remains a long one.

Write to Telis Demos at Telis.Demos@wsj.com

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