Profits of US banks do not impress amid tensions with recession

JPMorgan Chase, Bank of America, Citigroup and asset management giant BlackRock posted results that beat Wall Street forecasts on Friday, but investors were disappointed.

Trading was choppy, with most bank stocks falling in the open market before recovering. Shares in JPMorgan Chase were up about 1% in late morning, while the BofA was flat. Wells Fargo, which reported earnings that missed Wall Street’s targets, fell 1.5%. Citi was up 1%, while BlackRock was down about 1%.

“Earnings were solid, but the market is worried about recession fears,” said John Curran, MUFG managing director and head of North American banking coverage.

Investors may have been concerned by the pessimistic tone of the big banks. Executives are clearly still worried about inflation and the threat of a recession this year, following several interest rate hikes by the Federal Reserve.

JPMorgan Chase CEO Jamie Dimon said in the bank’s earnings statement that while the economy is still strong and consumers and businesses are spending and healthy, “we still don’t know the ultimate effect of the headwinds coming from geopolitical tensions, including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has driven up interest rates.”

The bank added in the earnings release that it now expects a “mild recession” as a baseline economic scenario. CFO Jeremy Barnum added during a conference call with reporters that, in addition to the slowdown that has already begun in his home loan unit, he is starting to see “headwinds” in auto lending.

Meanwhile, BofA CEO Brian Moynihan noted that this is “an increasingly sluggish economic environment” and Wells Fargo CEO Charlie Scharf said “we are looking carefully at the impact of higher fees on our customers.” . Wells Fargo recently announced plans to pull back on its huge mortgage business.

Banks are clearly worried about an impending recession, and Wall Street has taken notice.

Moody’s Investors Service analyst Peter Nerby noted in a report that “credit provisions are on the rise” at JPMorgan Chase and that Citi has “built capital and reserves in anticipation of a downturn in key markets”.

The Fed’s rate hikes aren’t helping either.

“Higher-than-expected interest rates pose a significant risk to credit quality prospects, loan growth and net interest margins,” David Wagner, portfolio manager at Aptus Capital Advisors, said in an email.

Worries about the economy were one of the reasons stocks plummeted in 2022, suffering their worst year since 2008. As a result of Wall Street’s slump, there was a major slowdown in merger and initial public offering activity.

This hurt the investment banking businesses of major banks. JPMorgan Chase and Citi said consulting fees were down nearly 60% in the quarter.

Goldman Sachs and Morgan Stanley will provide more details on the health of Wall Street next Tuesday (17), when both present their fourth quarter results.

Goldman Sachs, which aggressively built a consumer banking unit in recent years, has struggled to make money in that division. Goldman Sachs disclosed in a regulatory filing on Friday that it has lost more than $3 billion in its consumer business since 2020.

However, there were some signs of optimism. BlackRock, owner of the massive iShares family of exchange-traded funds, reported a recovery in assets under management in the third and fourth quarters, with shares soaring in October and November.

“The current environment offers incredible opportunities for long-term investors,” BlackRock CEO Larry Fink said in the earnings release.