It’s complicated: Big banks have a love-hate relationship with high interest rates

It's complicated: Big banks have a love-hate relationship with high interest rates

The common underlying theme in Q3 was increased write-offs – but it's still raining profits for (most of the) big banks.

by SARA KHAIRI

The third-quarter earnings season kicked off on Wall Street last Friday with JPMorgan Chase, Citigroup, and Wells Fargo reporting their financial results. Reports of Goldman Sachs, Bank of America, and Morgan Stanley followed this week. 

Quick overview: Although it's a new season, things seem pretty much the same as the last quarter for big banks – except that the figures and their impacts have heightened. While recent quarters have seen a similar trend of high interest rates generating higher net interest income, the same rate hikes have led to a surge in loan delinquency rates, whereas, loan growth has slipped. Correspondingly, these hikes also impeded the IPO market from making a comeback. Banks also felt the pressure to increase yields on deposits as customers increasingly shifted securities into higher-yielding schemes like money market funds. 

The Federal Reserve's rate policy is hung in the balance, with some analysts predicting higher for longer interest rates and others anticipating cuts just around the corner. Bank stocks dropped last month after the Fed signaled another hike is likely coming, yet most reported strong results for the third quarter.

JPMorgan Chase: Flexing its financial muscles

JPMorgan beat earnings estimates, navigating economic headwinds, and benefitting from higher interest rates.

• Net income soared 35% YoY at $13.15 billion, up from $9.74 billion in the same period a year earlier
• Total revenue jumped 21% to $40.69 billion, up from $32.7 billion a year ago
• Credit provisioning came in at $1.38 billion, much lower than the $2.39 billion estimate

On a per-share basis, profit rose to $4.33 a share from $3.12 a share a year earlier. The result surpassed analysts' forecasts for a profit of $3.95 a share, according to FactSet.

JPMorgan shares gained 1.5% last Friday following the report.

Citigroup: Rides high, thanks to high interest but struggles to increase stock value

Citigroup beat estimates with both institutional clients and personal banking contributing to overall increased revenue, partially offset by higher expenses and cost of credit.

• Net income came in at $3.5 billion for the third quarter, up 2% from the prior-year period
• The institutional clients unit reported $10.6 billion in revenue, up 12% YoY and 2% from the second quarter
• Revenue increased 9% YoY and came in at $20.1 billion 
• Total allowance for credit losses on loans was approximately $17.6 billion at quarter end, compared to $16.3 billion at the end of the prior-year period

Last month, Citi announced a major organizational shift that involved the dissolution of major divisions and overlapping managerial roles leaving behind five main divisions, followed by some high-profile layoffs. CEO Jane Fraser specified in the recent earnings conference that those changes would be completed by early 2024 and create financial benefits for the bank down the line. But its effects will become visible from this year's final quarter.

"Despite the headwinds, our five core, interconnected businesses each posted revenue growth resulting in overall growth of 9%. Services, our fastest growing business, grew by 13% with Treasury and Trade Solutions having its best quarter in a decade," said Jane Fraser, CEO of Citigroup.

Shares of Citi closed lower 0.2% last Friday.

Wells Fargo: Registers unexpected beats

Wells Fargo surpassed Wall Street expectations on the back of revenue generated from net interest income.

• Net income increased 8% to $5.77 billion in the third quarter from $3.59 billion a year earlier
• Total revenue increased 6.5% from the same quarter last year and came in at $20.9 billion for this quarter
• Provision for credit losses in the quarter included a $333 million increase bringing the total allowance for credit losses to $2.6 billion this quarter

Provision for credit losses surged on account of commercial real estate loans and higher credit card loan balances. 

"The office portfolio, in particular in the commercial real estate sector, is the place where we're seeing weakness," said Michael Santomassimo, finance chief of Wells Fargo.

The bank posted a decline in total deposits to $1.34 trillion from $1.41 trillion a year earlier. Wells Fargo is still facing the repercussions of the alleged illegal practice of secretly opening unauthorized accounts in 2016. In a move to soften the blow and repair its reputation, the bank agreed to pay $3 billion in 2020 and may continue with more job losses as well as other cost-cutting measures going forward.

Shares of Wells Fargo increased 3.1% following the report.

Goldman Sachs: A noisy quarter amid muted market conditions

Although Goldman Sachs surpassed analysts’ expectations, net income saw a significant dip for the quarter.

• Net profit slumped 33% to $2.06 billion, or $5.47 per share down from $3.07 billion, or $8.25 a share, in the same period a year ago
• Net revenue came in at $11.82 billion for this quarter, essentially unchanged compared with the third quarter of 2022 and 8% higher than the second quarter of 2023
• Provision for credit losses was $7 million compared with $515 million for the third quarter of 2022 and $615 million for the second quarter of 2023

In addition to pulling back on its nascent consumer lending business, Goldman is selling off its GreenSky business, whose write-off added to its expenses this quarter.

Goldman was also one of the lead underwriters for a slew of major market debuts in September, including Arm Holdings and Instacart. While these deals ignited a sense of optimism around the IPO market showing signs of life, the disappointing debut stock performances left a question mark around the market's stability. 

“We are confident that the work we’re doing now provides us a much stronger platform for 2024. As the leader in M&A advisory and equity underwriting, a resurgence in activity will undoubtedly be a tailwind for Goldman Sachs,” said David Solomon, CEO of Goldman Sachs.

Bank of America: Tops profit expectations in an ‘okay quarter’

Though behind peers JPMorgan and Citigroup, the second-largest US bank by assets saw a strong quarter edging out analysts’ expectations.

• Profit jumped 10% to $7.8 billion, or 90 cents per share, from $7.1 billion, or 81 cents a share, a year earlier
• Revenue climbed 2.9% to $25.32 billion
• Provision for credit losses was $1.2 billion, under the $1.3 billion estimate

Increasing interest rates catalyzed unrealized losses for the quarter, and climbed 13% to $131 billion on held-to-maturity bonds – mostly correlated to mortgage securities.

Shares of Bank of America closed more than 2% higher following its financial results.

Morgan Stanley: A dent in wealth management and investment banking

Morgan Stanley delivered underwhelming results attributed to increased credit loss provisions and expenses.

• Net income decreased 9% to $2.4 billion or $1.38 per diluted share, compared to $2.6 billion or $1.47 per diluted share in the previous year
• Revenue grew 3% and came in at $13.3 billion, up from $13.0 billion in the same period last year
• $134 million was allocated for provisions for credit losses in the third quarter, a significant increase from $35 million in the same period the previous year

The quarter was overall a miss, as the bank's main engine, its wealth management division, generated $6.4 billion in revenue, missing analysts' mark by more than $200 million. Investment banking revenue also dropped 27% YoY and didn't meet expectations for the quarter, generating $938 million in revenue below the $1.11 billion estimate, as a result of the frail IPO market. 

The bank’s shares dipped 6% following the report.

Market recap

A flat week for the IPO index with the exception of Wall Street oozing optimism

Wells Fargo (WFC) - up 4% to $41.18 per share

• Wells Fargo and JPMorgan Chase collectively raised $13.25 billion in the third quarter.
• With a net income increase of 8% to $5.77 billion in the third quarter from $3.59 billion a year earlier, WFC saw its maximum price increase since June 29.

BNY Mellon (BK) - up 2% to $42.19 per share

• BNY Mellon stock rose after earnings beat on Tuesday.
• Revenue in the quarter rose 2% to $4.37 billion, edging out estimates of $4.33 billion. Net interest revenue was up 10% to $1.02 billion. However, revenue and profits were down sequentially and net interest revenue dipped 8% as well.
• Management assured investors that its turnaround was making progress and that average deposits had started to pick up pace in September and October.

Editor's picks

Tweet of the week

Just look at the charts

1. JPMC has lost a quarter trillion dollars in deposits over the last 7 quarters

Source: Wall Street on Parade

2. The growth of equity trading at BofA & Goldman was mirrored by declines at Citi & JPMC

Source: BQ Prime

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