Higher interest rates are lifting the fortunes of the nation’s biggest banks. They aren’t doing the same for the banks’ customers.
Earnings for JPMorgan Chase, Citigroup, and Wells Fargo all rose in the third quarter largely because high rates allowed them to rake in more interest income.
These advantages show up in a key profitability metric known as net interest income, which measures the difference between what banks make on their loans and pay for their deposits.
That number was up by sizable amounts at all three banks when compared to the same period a year ago. Together the lenders pulled in a record $50 billion, 18% more than the same period last year. JPMorgan and Wells Fargo even lifted their guidance for how much net interest income they would earn for the full year.
Yet there were also clear signs that some of their borrowers are starting to struggle. JPMorgan, Citigroup, and Wells Fargo all increased the amount of loans they wrote off as losses. The combined charge-offs at those three banks totaled $3.98 billion, up 31% from the previous quarter and 105% from the same period a year ago.
The total was the highest amount collectively for the three lenders since the early days of the pandemic, in the second quarter of 2020.
At Citigroup, CEO Jane Fraser warned that US consumers were cutting back. “Continued deceleration in spending indicates an increasingly cautious consumer,” she said in a release.
Affluent customers, she added, are accounting for almost all of the spending growth and weakness is showing among those with lower credit scores. Citi expects its credit card losses to reach pre-COVID levels by the end of the year.
Wells Fargo had charge-offs of $850 million, $622 million from consumer loans. The bank expects its net interest income to fall 3% from the third quarter to the fourth.
“Where Wells Fargo sees weaknesses,” according to CFO Mike Santomassimo, is in commercial real estate, and “I think we will see some loss pickup in that portfolio over time.”
Wars in Ukraine and Israel, he added, could also impact energy, food markets, global trade, and geopolitical relationships.
“This may be the most dangerous time the world has seen in decades,” he said.
He admitted that the bank has been “over-earning on both net interest income and below normal credit costs, both of which will normalize over time.” He told reporters there is a “big debate” within the bank about when that normalization will happen.
“I personally think it will happen a little sooner than Jeremy,” he said, referring to his CFO.
The bank, he added, knows credit costs are going to go up. “They are trying to prepare the Street that you could see tougher times ahead.”
One regional bank, PNC (PNC), demonstrated the problems that smaller lenders have navigating this period of higher rates. Its profits and revenue fell from a year ago, as did its net interest income. It expects net interest income to fall again in the fourth quarter when compared to the third.
PNC’s stock fell 3% Friday while Citigroup’s stock sold off slightly in the later part of the day. JPMorgan and Wells Fargo both rose.
“The inflection point,” PNC CEO William Demchak said in response to a question about whether PNC’s net interest income had reached a trough, “I think is entirely dependent on what happens with the Fed in the coming year.”