Profits soar at JPMorgan, Wells Fargo as they defy deposit pressures

Bloomberg

Two of the country's biggest banks continue to rake in profits as the costs of their deposits rise less than expected, but it's unclear how long the good times will last, or whether smaller competitors can pull off the same trick.

During the third quarter at JPMorgan Chase, net interest income increased 30% year over year, while it rose by 8% at Wells Fargo, as the interest the two megabanks charged on loans outstripped what they had to pay their depositors.

But executives at both companies were uncertain about whether their outperformance will continue, underlining an industrywide challenge if interest rates stay high longer than previously anticipated.

"We're all in a bit of uncharted territory at this point with rates being where they are and the pace at which they got there," Michael Santomassimo, chief financial officer at the $1.9 trillion-asset Wells Fargo, said Friday on an earnings call.

Interest expenses in the banking industry have jumped sharply, thanks to the Federal Reserve hiking rates from near 0% to more than 5% since March 2022. JPMorgan and Wells haven't been immune to rising deposit costs, but the two banking giants have been able to keep a tighter lid on them than some competitors.

Still, JPMorgan Chase CFO Jeremy Barnum said Friday that the $3.9 trillion-asset bank has been "cautious about recognizing" that current levels of deposit costs don't seem sustainable.

The growing likelihood of the Fed keeping rates higher for longer has clouded the profitability outlook for banks of all sizes — an issue that analysts will watch closely when regional banks begin to report their earnings next week. Industrywide net interest income is expected to decline in 2024 before picking back up in 2025, according to Jefferies research published this week.

Stronger-than-expected net interest income figures at JPMorgan Chase and Wells Fargo helped boost their stock prices on Friday by 1.50% and 2.99%, respectively. Shares in Citigroup, which reported a 10% pickup in net interest income, were roughly flat on Friday. Bank of America, the other of the four largest U.S. banks, is scheduled to report results on Tuesday.

Pittsburgh-based PNC Financial Services Group on Friday reported slightly lower net interest income for the third quarter, and its stock price fell by 2.62%. Executives at the $557 billion-asset bank said deposit-cost pressures have slowed, but they noted that the outlook on Fed policy is unclear. PNC said Friday its layoffs reported this week would affect about 4%, or 2,400, of its more than 60,000 employees.

JPMorgan revised higher its estimate of full-year net interest income, a key revenue driver in 2023. America's largest bank now expects $88.5 billion of net interest income, up more than $2 billion from guidance released earlier this year.

While big banks are enjoying net interest income strength, analysts expect the comparable figures at regional banks to come under pressure in the coming months, thanks in part to rising deposit costs. Net interest income measures the difference between a bank's lending revenue and its deposit costs.

Megabanks have more diversified streams of revenue than their smaller competitors, plus a broader footprint to pull in deposits, said Brian Mulberry, a portfolio manager at Zacks Investment Management. 

"If it's David versus Goliath, Goliath is only getting bigger, and it seems like they're winning more at this point in time," Mulberry said.

Still, even the largest banks have been forced to pay customers higher interest rates on deposit accounts. During the third quarter, interest expenses at JPMorgan rose 170% from the same period a year earlier to $21.8 billion. At Wells Fargo, interest-related expenses totaled nearly $9 billion between July and September, 275% higher than in the third quarter of 2022.

Total profit at JPMorgan rose 35% year over year to $13.2 billion in the third quarter. Wells Fargo's earnings increased 61% from the third quarter of 2022, when it reported unusually high expenses tied to its regulatory troubles, to $5.8 billion in the latest quarter. At JPMorgan, revenue increased 22% to $39.9 billion during the same period, while it rose 7% to $20.9 billion at Wells.

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JPMorgan said that its purchase of part of First Republic Bank drove about $1.1 billion of profit and $2.2 billion in revenue during the third quarter. But it also said that those metrics would have risen even without the acquisition, which was arranged by the Federal Deposit Insurance Corp. after First Republic failed.

Growing credit card balances helped drive loan growth at JPMorgan, which saw an 18% increase in total loans. Wells Fargo, which has been revamping its credit card portfolio under CEO Charlie Scharf, also reported double-digit growth in its consumer card business. In the San Francisco bank's auto and home lending portfolios — two areas where it has been scaling back — loan volumes declined.

Wells Fargo's overall loan totals were down slightly from the third quarter of last year, with Scharf citing weaker loan demand and tighter underwriting criteria amid a more uncertain economic outlook.

The economic environment will drive the direction of loan growth moving forward, JPMorgan CEO Jamie Dimon said on a call with analysts.

"Depending on what you believe about a soft landing, mild recession, no landing, you have slightly lower or slightly higher loan growth," Dimon said. "But in any case, I would expect it to be relatively muted."