Published On : 01/12/2024

US bank profits fall in choppy quarter marked by special charges, falling lending margins

WASHINGTON (Reuters) -Major U.S. bank profits fell on Friday in a choppy fourth quarter complicated by special charges and job cuts, with signs an income boost from high U.S. Federal Reserve interest rates is waning and some consumer loans are starting to sour.

Still, JPMorgan, Wells Fargo, Bank of America, and Citigroup, the country’s largest lenders, struck an upbeat tone on the economy and said consumers generally remained resilient.

The Fed hiked rates last year in a bid to tame inflation. But with price increases slowing, the potential pace of interest rate cuts this year, and whether the economy will avoid a recession, is the key question hanging over markets.

Jamie Dimon, CEO of JPMorgan Chase, the biggest U.S. bank and a bellwether for the economy, said consumers were still spending and that the markets were expecting a soft landing, but warned government spending on green energy, healthcare and the military could continue to push prices higher.

U.S. consumer prices increased more than expected in December, with Americans paying more for shelter and healthcare.

“This may lead inflation to be stickier and rates to be higher than markets expect,” Dimon said. He also warned Fed rate cuts could drain liquidity from the system, and that the wars in Ukraine and the Middle East could cause global disruptions.

“These significant and somewhat unprecedented forces cause us to remain cautious,” he added.

Wells Fargo Chief Financial Officer Mike Santomassimo also warned rate cuts created more market uncertainty than usual.

JPMorgan gained 0.9% and Citi fell 1.2%, while Bank of America fell 2.4% and Wells Fargo was down 2.3%.

The banks combined set aside more than $8 billion to refill the Federal Deposit Insurance Corporation’s deposit insurance fund (DIF), which took a $16 billion hit after Silicon Valley Bank and two other lenders failed last year.

Citi, the most global U.S. bank, had a dismal quarter, swinging to a surprise $1.8 billion loss on the FDIC charges and as it stockpiled cash to cover currency risks in Argentina and Russia.

Citi will cut 20,000 jobs over the next two years, its Chief Financial Officer Mark Mason said. Wells Fargo also cut jobs, reporting a $969 million severance expense along with a $1.9 billion charge for the DIF.

Beyond those special charges, the picture for core revenue was mixed.

High rates last year boosted banks’ net interest income (NII), the difference between what banks earn from loans and pay to depositors, but that driver of margins looks to be flagging.

Bank of America’s profit shrank on the DIF charge, a one-off hit on how it indexed some trades, and a 5% decline in its NII as the bank spent more to keep customer deposits and demand for loans stayed subdued amid high interest rates.

Of the four, Wells Fargo was the only lender to post a jump in profits, thanks to cost cuts, beating analyst expectations. But it warned that 2024 NII could be 7% to 9% lower than a year earlier.

JPMorgan also put in a strong performance. Its quarterly profits fell, but the Wall Street giant posted a record annual profit of $49.6 billion and a 19% jump in NII.

“My biggest worry is (did) the benefit of interest rates already occur?,” David Wagner, Portfolio Manager and Equity Analyst at Aptus Capital Advisors, which holds all four banks, wrote in an email to Reuters.

SOURING LOANS

All the lenders all set aside more money to cover souring loans and charge-offs, or debts that are unlikely to be recovered, on some consumer loans rose.

Charge-offs at Bank of America – which has the biggest consumer bank – rose to $1.2 billion in the fourth quarter from $931 million in the third quarter, mainly from credit cards and office real estate.

Consumer delinquencies and charge-offs had declined during the pandemic, as government stimulus and lockdowns boosted consumer savings.

Jeremy Barnum, JPMorgan Chase chief financial officer, said that the bank consumer credit metrics including credit cards had now all returned to normal. Citi also said credit costs in the U.S. personal banking division were rising due to “continued normalization” in non performing loans in credit cards.

“We have been watching credit card performance which has been normalizing. Loss rates still below long run averages, but these are back to pre-pandemic levels,” said Christopher Wolfe, head of North American banks ratings for Fitch.

(Reporting by Niket Nishant, Mehnaz Yasmin, Noor Zainab Hussain and Manya Saini in Bengaluru; Carolina Mandl, Nupur Anand, Tatiana Bautzer, Saeed Azhar, Lance Tupper, Lananh Nguyen, and Chibuike Oguh in New York; Writing by Michelle Price, Editing by Nick Zieminski)

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