Big U.S. banks make a good start to earnings season, despite dropping profits
JPMorgan Chase, Wells Fargo and Citigroup reported their Q3 results on Friday, with all banks reporting falling profits between 17% and 30%, hinting towards economic slowdown.
Nevertheless, household spending is mostly holding up, buffering profits from turmoil in financial markets.
If it were to the banks’ announcements of solidity, investors would sleep like babies. The only grey area would be the slightly decrease of customer savings and the harder-to-get credits.
JPMorgan had a solid quarter, even if a boost from rising rates was expected. Its deposits fell by 3%, with the same happening in Wells Fargo’s case.
JPMorgan expects 1.5% charge-off debts, while car-loan delinquencies are increasing.
Still, the consumer bank is making a return on equity of 33%, so this is an acceptable price to pay.
JPMorgan boss Jamie Dimon said on Thursday that he thinks consumers can spend at their current clip for another nine months before running out of steam. So this should be concerning.
But, the tougher regulations put in place since the sub-prime crisis forced banks to build buffers to protect themselves.
JPMorgan has saved money to cover losses on 6% of its credit-card loans, for example, and its total provisions are 45% higher than they were at the end of 2019.
Citi has given itself a rescue net equivalent to 7.5% of its U.S. credit-card lending, according to Reuters.
Not taking enough risks though is weighing on valuations, along with the expectations of a slowing economy.
The big banks’ shares are down roughly 40% this year, while the S&P 500 Index is down just over 23%. It’s no surprise since under U.S. rules the banks must hold a rising amount of capital.
But not taking enough risks has also a better side: the next financial crisis should not be the banks’ wrong doing.
A real systemic threat is lurking in the dark, though. The recent developments in Britain’s pension-fund raise questions, because there’s a risk that financial regulators didn’t see it coming.