The largest U.S. banks, JPMorgan, Wells Fargo, and Citigroup, painted a picture of a robust economy, demonstrating resilience in the face of quickly rising interest rates. JPMorgan's Q2 profit soared 67% year over year, while Wells Fargo saw a jump of 57%, largely driven by higher income from lending out money at increased rates. Citigroup also experienced heightened net interest income, despite a 36% drop in profits. All three banking giants exceeded analysts' profit and revenue expectations. The banks expanded their loan books from the previous year, due to an upturn in credit card balances and optimistic forecasts for their 2023 lending profits, indicating they do not anticipate major changes in borrowing or deposits.
Despite a slowing economy since the Federal Reserve began lifting rates last year, the positive results from these major banks have somewhat overshadowed the banking crisis earlier this year. Silicon Valley Bank, Signature Bank, and First Republic Bank collapsed under the weight of higher interest rates, but these larger institutions weathered the storm and attracted customers seeking stability. The government-aided acquisition of First Republic by JPMorgan bolstered its consumer and commercial businesses, resulting in a direct gain of $2.7 billion. However, smaller and mid-sized lenders face potential difficulties in the face of heightened expenses.
Bank stocks have split this year with JPMorgan, Wells Fargo, and Citigroup experiencing increases, whereas the broader KBW Nasdaq Bank Index fell 18% for the year. Regional banks, feeling the pressure, have recently reduced their Q2 earnings forecasts, having underestimated the rising deposit costs. Despite the relative success of the major banks, executives expressed caution regarding future economic uncertainty, with JPMorgan CEO Jamie Dimon admitting he could not predict the severity of potential recessions.
Despite the uncertainty, default rates remain low, and the major banks have set aside funds in anticipation of potential future defaults. Economic data and bank executives suggest the crisis seen in March has receded, spurring optimism for economic recovery. This hope is reflected in the market, with investors embracing risk-on trades they previously avoided and major tech stocks and Bitcoin increasing in value. Despite these positive signs, the banks are beginning to feel the squeeze, needing to pay more to keep their depositors, and witnessing a decrease in deposits. If the higher interest rates impact consumers and businesses more significantly, the loan situation may worsen, leading to a challenging environment even for the large banks.
