Bank earnings woes, Discover lawsuit and other issues facing investors

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Earnings season is in full bloom across the financial services industry, with many bank stocks up for the year so far. But the looming high interest rate environment, combined with credit volatility and net interest margin fluctuations, impacted performance in other market segments. Experts are now wondering if share price growth can keep pace.

Indexes measuring the overall performance of bank stocks, including the KBW Nasdaq Bank Index and the Dow Jones U.S. Banks Index, were up year to date at roughly 14% and 19% as of Tuesday.

While still significantly elevated, inflation decreased slightly, by 10 basis points to 3%, as reported by the U.S. Department of Labor's Bureau of Labor Statistics on July 11, bringing the figure to its lowest level in 12 months. 

Read more: Why bank stocks may struggle to muster more momentum

Cooling inflation could help bring about an interest rate cut from the Federal Reserve by September at the earliest, according to Julien Lafargue, chief market strategist at Barclays Private Bank. 

"We expect to see continued, albeit slow, disinflation," he said in a recent interview with American Banker's Jim Dobbs, adding that future rate reversals will be done gradually and will see borrowing costs remain elevated going into 2025.

Among those reporting positive second quarter earnings are the $563 billion-asset PNC Financial Services Group, $326 billion-asset State Street and the $428.5 billion-asset Bank of New York Mellon. Increased interest income played a hand in the Pittsburgh-based PNC's performance, while boosted assets under custody and administration and assets under management drove progress at both BNY and State Street.

But not every institution that recorded growth over the last three months did so unscathed. 

Wells Fargo saw profits jump to $4.9 billion between April and June, up $300 million from the previous three months, but saw its net interest income sink below $12 billion for the first time in roughly two years due to heightened deposit costs and other driving conditions.

Read more: It's time for a more collaborative approach to bank regulation

Some executives have been working with regulators in the background of these results on multi-million dollar settlements for recent and past misdeeds.

In addition to recent fines against Citigroup for faults in its risk management and internal controls systems, the bank is navigating a complex overhaul plan with the Office of the Comptroller of the Currency to remedy those vulnerabilities. This is in tandem with its CEO Jane Frasier trying to streamline the organization.

The latest hurdle in Discover Financial Services' merger saga with Capital One Financial has seen the credit card network set aside $1.2 billion to close out a lawsuit with merchants that it overcharged for more than a decade.

Read more about the recent issues facing the banking industry and what they mean for investors.

Cooper Neill/Bloomberg

Wells Fargo's profits weighed down by rising deposit costs

Wells Fargo's profits rose to $4.9 billion across the last three months, driven by higher fee revenue and efforts to reduce noninterest expenses, but rising deposit costs put a damper on overall growth.

Increased competition with other financial institutions drove the bank to offer more interest to depositors, while high borrowing costs led to "tepid" loan demand from businesses, according to Charlie Scharf, chief executive of Wells Fargo. This combination of factors saw Wells Fargo's net interest income to dip below $12 billion for the first time since the Federal Reserve began raising rates in 2022.

"They're still having to pay more to their deposit customers," Kyle Sanders, senior equity research analyst at Edward Jones, recently told American Banker's Polo Rocha. "Until the Fed cuts, that's going to continue to happen."

Read more: Wells Fargo's rising deposit costs continue to put a drag on profits

Juan Cristobal Cobo/Bloomberg

Citi stays the course for expenses amid OCC fines

Citigroup executives are remaining steadfast in their full-year operating expense guidance for the bank this year, despite incurring two concurrent fines from the Federal Reserve and the Office of the Comptroller of the Currency this month. The civil penalties, totaling $136 million, seek to address issues related to poor data quality management that were at the heart of a pair of consent orders from 2020.

Predictions for Citi's total operating expenses estimated between $53.5 billion and $53.8 billion, but Chief Financial Officer Mark Mason told investors during the bank's earnings call on July 12 that the final number would likely be towards the higher end of that range.

"We are actively managing that with an eye towards what's required" for the risk management overhaul in order "to keep it on track, to accelerate in areas where we're behind," Mason said.

Despite the regulatory shake up, American Banker's Allissa Kline writes that Citi's total revenue was up 4% year-over-year, to $20.1 billion, and net income jumped by 10% from the same quarter last year, to $3.2 billion.

Read more: Citi sticks to expense forecast as it prepares key plan for OCC

Liam Kennedy/Bloomberg

Fifth Third reaches $20 million settlement with CFPB over wrongdoings

Fifth Third Bancorp reached a $20 million agreement with the Consumer Financial Protection Bureau this month to resolve offenses relating to fake checking accounts and force-placed auto insurance.

American Banker's Kate Berry writes that according to the CFPB, the $214 billion-asset Fifth Third force-placed or maintained duplicative insurance more than 37,000 times over roughly a decade ending in 2019, leading to the vehicles of 1,000 consumers being illegally repossessed. These offenses amounted to $5 million out of the total $20 million in penalties.

The remainder of the settlement deals with a suit filed against the bank by the CFPB in 2020, where the regulator alleged that Fifth Third opened checking accounts without the authorization of its consumer customers.

Read more: Fifth Third settles with CFPB over fake accounts, insurance violations

Fraud proofing branches, rising credit card charge-offs: JPMorgan updates

Very few financial institutions are untouched by the high interest rate environment regardless of asset size, and JPMorgan Chase is no exception. The $4.1 trillion-asset bank saw a 50% boost in investment banking fees year-over-year, but was held back by consistently increasing credit card charge-offs.

JPMorgan's net charge-off rate rose to 3.5% for the second quarter, up from 2.4% the year prior, but executives told analysts in the bank's earnings call this month that the rise in credit costs was "not a very interesting story." Credit loss provisions at the bank more than doubled since the last quarter, from $1.9 billion to $3.1 billion, to account for bad loans that were charged off and provide a cushion for future instances.

Analysts with Piper Sandler were similarly unworried by the increase in reserves, saying in an interview with American Banker reporter Catherine Leffert that the bank's credit "normalization" is not indicative of any widespread challenges.

"I think they're just being appropriate with their reserve building, particularly given that [the] credit card [business] has been a growth area for them," said Scott Siefers, an analyst at Piper Sandler. "So you just need to keep pace with that balance sheet growth."

In the foreground of JPMorgan Chase's earnings season, the bank is changing up its approach to fraud prevention by incorporating more technology across its branch network. Identity checks will be done via kiosks that prompt customers for their account password or other identification, as opposed to a teller manually verifying credentials.

Read more: JPMorgan gets lift from investment bank, offsetting jump in credit costs
How JPMorgan Chase is fraud-proofing its branches

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Discover approaches $1.2 billion finish line in merchant lawsuit

Discover announced on July 3 that it is preparing to pay $1.2 billion as part of a settlement with merchants who sued the credit card company after being overcharged for almost 16 years. Within that announcement, Discover said that it had already allocated the necessary capital needed to cover the refunds under the agreement.

The lawsuit was among a host of issues that likely resulted in the resignation of Roger Hochschild, former president and CEO of Discover, in August 2023.

Clearing this legal hurdle is a vital part of the proposed merger between Discover and Capital One, which still requires regulatory approval and has drawn intense criticism from consumer advocacy groups fearing decreased competition in the market.

Read more: Discover settles $1.2B loose end ahead of Capital One merger