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Three of the largest US banks experienced a surge in profits due to increased loan charges, benefiting from the Federal Reserve’s interest rate hikes.
In the second quarter, JPMorgan Chase, Citigroup, and Wells Fargo collectively earned $49 billion in net interest income, the difference between what the banks pay for deposits and what they earn from loans and other assets. This figure was 30% higher than the same period last year, highlighting the impact of the Fed’s tightening since March 2022.
While the major banks charge higher rates for loans, they have managed to avoid paying significantly more to depositors. JPMorgan, the largest US bank, raised its full-year net interest income forecast from $84 billion to $87 billion. Chief Financial Officer Jeremy Barnum attributed this increase to higher rates and lower deposit reprice than previously expected.
JPMorgan’s deposits saw a 1% increase during the quarter, reaching nearly $2.4 trillion, boosted by the acquisition of First Republic in May. Barnum stated that the bank’s net interest income levels are not sustainable in the long term and will eventually decrease as competition for deposits intensifies.
Jamie Dimon, JPMorgan’s CEO, emphasized the need to compete in a rising rate environment, as competition from other banks and alternative products like money market funds becomes more prominent. While larger banks have benefited from a flight to quality, smaller banks have faced pressure to increase deposit rates, negatively affecting their profit margins.
State Street, a custody bank, experienced a 10% decrease in shares after warning about paying higher interest rates to retain deposits from larger institutional clients seeking better savings rates.
Higher rates have also put pressure on borrowers, particularly in commercial real estate, raising concerns about loan defaults. In the second quarter, JPMorgan set aside $1.5 billion in reserves to cover potential loan losses.
The increase in lending profits compensated for a decline in investment banking fees for JPMorgan and Citigroup. JPMorgan reported a 6% decrease in investment banking fees to $1.56 billion, while Citi’s fees were 31% lower at $686 million. Citi CEO Jane Fraser expressed disappointment in the quarter, as the expected rebound in investment banking has not materialized.
Overall, JPMorgan’s net income rose 67% compared to the previous year, reaching almost $15 billion and surpassing analysts’ estimates. Wells Fargo, the fourth-largest US lender, saw profits increase by over 50% to nearly $5 billion. However, Citi’s profits fell by over a third due to slower corporate spending, lack of deals, and costly layoffs.
Wells Fargo predicted a 14% increase in net interest income for this year, while Citi projected over $46 billion in net interest income, up from a previous forecast of $45 billion. Bank of America, Morgan Stanley, and Goldman Sachs will report their results later this week.
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