Image: AI

JPMorgan Chase, Wells Fargo and Citigroup reported their third quarter earnings on Friday, offering the first glimpse into how major banks are faring amid economic uncertainty.

The headline results were mixed, with some beats and misses versus analyst estimates. JPMorgan posted earnings per share of $3.12, surpassing forecasts of $2.88 per share. Meanwhile, Citigroup’s EPS of $1.63 fell short of the $1.67 expected. Wells Fargo met expectations with EPS of $1.30.

Revenue was a bright spot for JPMorgan and Citi, both exceeding projections. JPMorgan generated record revenue of $33.5 billion, up 10% year-over-year, reflecting higher net interest income from rising rates. Citi saw an 8% revenue jump to $18.5 billion. However, Wells Fargo’s revenue of $19.5 billion missed estimates by $960 million.

In the opening bell reactions, JPMorgan stock climbed 2.5%, Citigroup rose 0.8%, but Wells Fargo slipped 3.3%.

The quarterly results come amid a cloudy economic picture. With inflation still elevated, the Federal Reserve is aggressively hiking interest rates to cool demand. This risks tipping the economy into a recession. The bond market turmoil, market volatility and dampened consumer sentiment have banks bracing for choppy conditions ahead.

“We still remain cautiously optimistic on the economy, given uncertainty around inflation and other geopolitical risks, but consumers are spending money still,” said JPMorgan CEO Jamie Dimon. He predicted a mild to more pronounced recession ahead.

Here are the key takeaways from the big bank earnings:

JPMorgan Beats Expectations But Cautious On Outlook

• EPS of $3.12 beat forecasts by 8%, driven by higher net interest income from rate hikes. Record revenue of $33.5B topped estimates.
• However, JPM set aside $1.5B in credit reserves, signaling concerns about deteriorating credit conditions.
• CEO Jamie Dimon described the U.S. economy as “still doing well” but voiced caution about risks ahead from high inflation, Fed tightening and the war in Ukraine.
• JPMorgan stock rose initially in early trading but gave up gains on worries about the bank’s recessionary outlook.

Wells Fargo’s Profits Decline on Higher Loan Loss Provisions

• EPS of $1.30 met expectations, but revenue missed forecasts by nearly $1B at $19.5B as demand for mortgages declined.
• Profits fell 31% from a year ago as Wells Fargo added $784M to loan loss reserves amid inflation worries.
• CEO Charles Scharf said Wells is closely monitoring risks like high inflation and rising rates. The lender is tightening underwriting standards for new loans.
• Wells Fargo shares fell 3% on lower-than-expected revenue and concerns about credit exposures in a weakening economy.

Citigroup Tops Earnings Estimates But Sees Challenging Backdrop

• EPS rose 25% year-over-year to $1.63, exceeding estimates by 2 cents on lower expenses and strong trading revenue.
• Total revenue climbed 8% to $18.5B, beating forecasts as investment banking fees grew amid market volatility.
• However, Citi is bracing for economic headwinds, forecasting that net interest income will fall in the fourth quarter as deposit costs rise faster than yields.
• Citigroup stock edged up slightly as the bank’s upbeat Q3 results eased some concerns about the challenging macro environment.

Big Banks Grapple With Slowing Demand and Recession Fears

The quarterly reports depicted banks navigating an increasingly precarious economy, weighed down by factors like:

• Declining mortgage demand as rates surpass 7%, crimping a key profit driver. JPM set aside 10% more credit reserves for home lending.
• Businesses reluctant to take on loans amid inflation/rate worries, slowing commercial loan growth.
• Consumers spending cautiously as inflation eats into incomes, hitting card purchase volumes.
• Growing risks of delinquencies and defaults as rates rise, spurring larger provisions for loan losses.
• Deposit costs soaring much faster than yields on loans, squeezing net interest margins.

To offset the revenue impacts, banks are strategizing cost efficiencies and leveraging areas like trading to boost fee income. They are also benefiting from higher net interest income in a rising rate environment. However, if economic conditions significantly deteriorate, credit costs and defaults could jump.

Jamie Dimon summed it up, saying: “While we are hoping for the best, we always remain vigilant and are prepared for bad outcomes so we can continue to serve customers even in the most challenging of times.”

Banks Face Murky Backdrop But Remain Optimistic

The third quarter bank earnings highlight both lingering pandemic tailwinds like low delinquencies along with emerging risks from factors like inflation and soaring rates. While the banks voiced caution about traps ahead, their overall results showed resilience.

Traders initially reacted positively to the earnings beats from JPMorgan and Citi. But banks pared gains as concerns about their recessionary outlooks weighed on sentiment.

Looking ahead, banks are positioned to benefit from higher interest rates, but also face threats from an economic downturn. Their guidance indicates uncertainty about what’s in store for the critical financial sector.

For now, big banks project confidence they can navigate potential pitfalls. But as high inflation persists and the Fed maintains its aggressive stance, challenges loom. The path forward remains clouded in uncertainty.

Stay tuned to American Money for the latest updates on bank earnings and what they could mean for the markets and economy. Sign up for our newsletter and follow us on social media for real-time analysis.