The US earnings season starts off strong: JPMorgan Chase, Wells Fargo, and Citigroup Q3 performance impressive with net interest income exceeding expectations | Earnings Report Insights

Just as the market was concerned about whether the high interest rate environment would shrink the profits of the largest banks in the United States, the latest earnings reports seem to dispel these doubts.

On October 13th, three of the four largest banks in the United States, JPMorgan Chase, Wells Fargo, and Citigroup, successively released their third-quarter earnings reports. Among them:

JPMorgan Chase reported adjusted revenue of $40.69 billion, higher than the market's expected $39.92 billion; net profit of $13.151 billion, a significant year-on-year increase of 35%.

Wells Fargo's third-quarter revenue was $20.86 billion, also higher than the market's estimated $20.16 billion.

Citigroup's revenue increased by 9% to $20.1 billion, higher than analysts' forecast of $19.27 billion, and net profit increased slightly by 2% to $3.546 billion.

It is worth noting that the main source of income for these three banks, net interest income (NII), exceeded expectations.

JPMorgan Chase's net interest income for the third quarter was $22.9 billion, a year-on-year increase of 30% (excluding the acquisition of First Republic Bank this year, a year-on-year increase of 21%), reaching a new high.

Wells Fargo's net interest income was $13.1 billion, an increase of 8.3% compared to the same period last year, exceeding analysts' expectations of $12.8 billion.

Citigroup's net interest income in the third quarter decreased slightly by 1% to $13.8 billion compared to the previous quarter, but still increased by 10% year-on-year.

Wall Street News previously mentioned that the US banking industry is under tremendous pressure due to long-term high interest rates. The increase in bad debts caused by credit deterioration and the competition caused by the rise in deposit costs may lead to a decrease in banks' net interest income.

However, the earnings reports of the major banks have temporarily dispelled this concern.

After the release of the earnings reports, JPMorgan Chase's stock price fell slightly before the market opened, but the increase expanded to 5% after the market opened, the largest increase since April.

Wells Fargo's stock price rose more than 2% before the market opened and nearly 4% after the market opened.

Citigroup's stock price rose 2% before the market opened and more than 3.5% after the market opened.

Jamie Dimon, CEO of JPMorgan Chase, commented in the earnings report that the better-than-expected performance this quarter was mainly due to the excess income from net interest income and "below normal levels" of credit costs, but both factors will "normalize" over time. Damon also stated that given the uncertainty of the macro environment, the current situation may be the "most dangerous moment in decades".

Although US consumers and businesses are "generally" healthy at the moment, consumers are depleting their cash savings:

However, the labor market remains tight, government debt levels are extremely high, and the fiscal deficit has reached its highest level in peacetime, all of which increase the risk of continued high inflation and further interest rate hikes.

In addition, we still do not know the long-term consequences of quantitative tightening policies, as quantitative tightening policies reduce liquidity in the system as market-making capabilities are increasingly restricted by regulations. Furthermore, the conflicts between Russia and Ukraine and in the Middle East may have far-reaching effects on energy and food markets, global trade, and geopolitical relations. This may be the most dangerous moment in decades.

Charlie Scharf, CEO of Wells Fargo, also raised concerns about economic slowdown in the earnings report:

Our revenue growth compared to the same period last year includes higher net interest income and non-interest income, which benefited from higher interest rates and our investments in the business. As operating losses decreased, expenses decreased compared to the same period last year. While the economy continues to show resilience, we have also seen the impact of economic slowdown - loan balances have declined and charge-offs have continued to deteriorate slightly.

In addition, Wells Fargo repurchased 33.8 million shares of common stock in the third quarter of 2023, equivalent to approximately $1.5 billion.

JPMorgan Chase: Net Profit Increases by 35% YoY, Credit Card Charge-offs Increase

During the reporting period, JPMorgan Chase achieved significant profit growth, but the credit card charge-off ratio increased.

The financial report shows that JPMorgan Chase's net revenue for the reporting period was $39.87 billion, a year-on-year increase of 22% and a QoQ decrease of 3%; adjusted net revenue was $40.686 billion, a year-on-year increase of 21%, and a 15% increase excluding First Republic Bank.

In terms of profitability, JPMorgan Chase achieved a net profit of $13.151 billion, a year-on-year increase of 35%, and a 24% increase excluding First Republic Bank; diluted earnings per share increased by 39% YoY to $4.33, lower than the previous quarter's $4.75.

JPMorgan Chase's non-interest income in the third quarter was $17.8 billion, a year-on-year increase of 12%, and an 8% increase excluding First Republic Bank. JPMorgan Chase stated that the above-mentioned revenue was mainly driven by the growth of non-interest income in the corporate and investment banking business, the increase in asset management fees, and the decrease in net investment securities losses compared to the previous year, partially offset by the impairment of equity investments in the expense business.

It is worth noting that JPMorgan Chase reported a net charge-off of $1.5 billion, an increase of $770 million, mainly driven by credit card services. Previous data showed an increase in credit card delinquency rates in the United States. In the current quarter, the net income attributable to First Republic Bank was $1.1 billion, including $1.5 billion in net interest income, $761 million in non-interest income, $858 million in expenses, and a net credit loss provision of $7 million.

By business segment, the Consumer and Community Banking (CCB) division of JPMorgan Chase reported a net revenue of $18.4 billion for the quarter, a year-on-year increase of 29%, with a net profit of $5.9 billion, a year-on-year increase of 36%.

Among them, the revenue from the Banking and Wealth Management business increased by 43% to $11.3 billion, excluding First Republic Bank, the growth was 30%. JPMorgan Chase stated that this was mainly due to the increase in net interest income, reflecting the improvement in deposit profitability, but the increase was partially offset by the decrease in deposit balances.

The net income from the mortgage business was $1.3 billion, a 36% increase, but a 2% decrease excluding First Republic Bank, mainly due to the narrowing of loan interest spreads, which led to a decrease in net interest income, but was offset by the growth in service and production income.

The credit loss provision was $1.4 billion, reflecting a net charge-off of $1.4 billion and a net provision increase of $47 million, including a net provision increase of $301 million for the bank card services business and a net release of $250 million for the mortgage business.

Unlike the retail banking division, the Corporate and Investment Banking (CIB) division of JPMorgan Chase saw a decline in profit in the current quarter.

During the reporting period, the net profit of this division was $3.1 billion, a decrease of 12%, and the net revenue was $11.7 billion, a decrease of 2%.

Wells Fargo: Revenue and profit exceed expectations, net interest income forecast raised

Wells Fargo also reported an increase in net interest income, as well as an increase in non-performing loans.

During the reporting period, Wells Fargo's adjusted net revenue was $20.86 billion, a year-on-year increase of 7%. Net profit reached $5.767 billion, a year-on-year increase of 61%, and diluted earnings per share were $1.48, a year-on-year increase of 72%.

Net interest income was $13.105 billion, an 8% increase, with a slight decrease compared to the previous quarter.

Wells Fargo raised its net interest income guidance for 2023, expecting a growth of 16% compared to the same period last year, up from the previous forecast of 14%.

In addition, the bank also raised its expenditure forecast for 2023 to approximately $51.5 billion, higher than the previous estimate of approximately $51 billion. Due to the increasing number of companies opting for hybrid offices, the US commercial real estate market continues to be weak, and some commercial real estate loans have already turned bad.

Wells Fargo stated that the credit loss provision for the quarter was mainly for commercial real estate office loans. The bank set aside $359 million for credit losses in the commercial real estate office sector, bringing the total provision for the first nine months of 2023 to $2.6 billion.

In the third quarter, Wells Fargo's net charge-offs as a percentage of average loans stood at 0.36%, higher than 0.32% in the third quarter of 2022 and 0.17% in the third quarter of 2022.

During the earnings conference call, Wells Fargo CFO Michael Santomassimo commented:

The office building investment portfolio, especially in the commercial real estate sector, is where we see weakness.

We do expect some losses to materialize over time, but we have not seen any significant losses yet.

Citigroup: Revenue and Profit Beat Expectations, but Expenses Rise

The earnings report shows that Citigroup's third-quarter profit increased slightly by 2% to $3.546 billion, with diluted earnings per share of $1.63, unchanged from the same period last year, and higher than the Wall Street expectation of $1.22.

Net revenue grew by 9% to $10.2 billion compared to the previous year, surpassing Wall Street's expectation of $9.27 billion.

Due to the rise in deposit costs, Citigroup's net interest income in the third quarter decreased slightly by 1% MoM to $13.8 billion, but still grew by 10% YoY.

During the reporting period, Citigroup's operating expenses were $13.5 billion, a 6% increase YoY, mainly due to investments in risk and controls, severance costs, and the impact of inflation.

In September of this year, Citigroup announced a restructuring measure to cut costs, which involves streamlining its structure by eliminating the individual banking and wealth management layer, as well as regional layers in the Asia-Pacific, Europe, Middle East and Africa, and Latin America. However, the new structure has not yet been reflected in the third-quarter performance.

Revenue from Citigroup's institutional clients division increased by 12% compared to the same period last year, with investment banking expenses up 34% and transaction solutions revenue up 12%.

In addition, although the delinquency rate remains low compared to historical levels, Citigroup has set aside more funds to address potential bad loans, with the total credit portfolio allowance increasing from $16.3 billion a year ago to $17.6 billion.

Citigroup's credit costs in the third quarter were approximately $1.8 billion, compared to $1.4 billion in the same period last year, mainly driven by the continued normalization of net credit losses and the growth in the number of individual banking and wealth management cards. The net allowance for credit losses (ACL) was $125 million, primarily driven by branded cards and retail services, and is mainly related to the growth in card balances.