Banks found themselves under the microscope following the collapse of Silicon Valley Bank, Credit Suisse and First Republic in the first half of the year. According to the Federal Reserve’s annual stress test conducted in June, the largest US banks exhibited the wherewithal to weather a severe recession. US big banks showed that they could continue lending to businesses and consumers even against elevated interest rates and maintain minimum capital levels despite billions in projected losses for the sector.
The three of the largest US banks, JPMorgan Chase, Wells Fargo and Citigroup, helplessly watched almost $85 billion in deposits vanish in the third quarter. So, is the US banking sector really as strong and resilient as indicated by the Fed’s stress test? Let’s take a look at their third-quarter results and forward projections to determine whether investor faith can be restored.
JPMorgan Chase: The Joy of Interest Income
The world’s largest bank by market cap, JPMorgan is considered a bellwether not just for the US financial market but for the global investment banking sector. And this was reflected in its third-quarter performance. JPMorgan navigated the challenging backdrop with the strength and conviction of a leader, despite the $31 billion decline in deposits.
JPMorgan’s revenue growth was driven by higher interest rates, which allowed the bank to charge customers much more on loans than it did last year. Management also cited good credit quality as a driver of the performance.
Management raised their full-year guidance for net interest income for the fourth time this year, from $87 billion to $88.5 billion. CEO Jamie Dimon admitted that the earnings beat was driven by ‘over-earning’ on net interest income and below normal credit costs, both of which should normalise by the end of this year.
When asked about the Fed’s rate hike plans ahead, Dimon said, “I don’t think it makes a piece of difference whether the rates go up 25 basis points or more, like zero, none, nada.” JPMorgan does have the resources in place to defend itself even if the global economic scenario worsens. This is reflected in the bullish sentiment for JPMorgan on Acuity’s AssetIQ widget.
Wells Fargo: Higher Interest Rates Offset Slowing Lending Activity
Wells Fargo, which serves more than 70 million customers, reported a stellar performance for the third quarter.
With slowing lending activity, the bank reported a decline of $7.1 billion in deposits, to $1.34 trillion in the quarter. CEO Charlie Scharf said Wells Fargo was witnessing the “impact of the slowing economy with loan balances declining and charge-offs continuing to deteriorate modestly.”
Management said Wells Fargo’s provision for credit losses in the quarter included an increase of $333 million for credit losses for commercial real estate office loans and higher credit card loan balances. The bank guided to net interest income of $45 billion for the full year, representing 10% year-over-year growth.
Wells Fargo’s stock has lost around 6% year to date, while rival JPMorgan has made around the same percentage in gains. In fact, Wells Fargo’s stock has been undervalued for some time, having lost around 14% over the past year and is not an investor favourite, despite the bank’s ability to withstand a murkier macro environment.
Citigroup: Things Aren’t Looking Up Since Jane Fraser Took Over as CEO
Citigroup has been the worst performer among the top US banks this year. Despite higher-than-expected earnings and the best quarter in around a decade, its shares closed 0.2% lower on the day of the release. Citi recorded a decline of $46.4 billion in deposits in the third quarter.
The bank’s performance has been deteriorating since CEO Jane Fraser took over. The stock has lost roughly 40% since Fraser become CEO in 2021, during which time other US big banks have expanded their market cap. In fact, Citi is the second-worst performing stock (behind Monster) in the S&P 500 index in the past two decades.
Fraser announced a restructuring initiative last month, focused on improving Citi’s profitability. The restructuring involves simplifying the bank’s structure, which involves eliminating several layers of middle management. Citi has already announced some high-profile departures as part of the initiative.
Citigroup has enough loss reserves to manage an economic slowdown and even a recession. Also, the bank has divested large noncore businesses, which should reduce capital requirements. Despite this, continued investor caution has sent the stock to extremely depressed levels.
Low lending is likely to continue weighing on the performance of the banking sector, although the big banks seem well positioned for both the fourth quarter and 2024. The Fed’s comments regarding interest rates being higher for longer is certainly not doing them any favours.