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Biggest Banks Challenged

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High interests are pushing even the big banks.

Three massive banks experienced a decline in a major source of income during the first three months of the year, demonstrating that even the largest financial institutions are seeing the same difficulties as the rest of the industry as long as interest rates remain high.

On Friday, JPMorgan Chase, Citigroup, and Wells Fargo announced a decline in their net interest income from the fourth quarter to the first. At JPMorgan, Wells Fargo, and Citigroup, it was down 4%, 4%, and 2%, respectively.

It was JPMorgan’s first consecutive decline in almost three years. Its stock saw its biggest one-day decline since 2020 when it dropped by more than 6%. Citigroup’s stock was down about 2%, and Wells Fargo’s remained flat.

Significance of Net Interest Income

For many banks, net interest income is a crucial metric since it shows the difference between the interest they get from their assets and the interest they pay on deposits.

Due to rising interest rates and deposit fees, smaller banks have found it difficult to increase this metric over the past year. Even among the biggest lenders in the country, there are indications from the first quarter that growth is being negatively impacted by high rates.

The decline in JPMorgan’s net interest income was attributed in a press release to “deposit margin compression and lower deposit balances.”

Depositors are transferring their money into products like certificates of deposit, where JPMorgan must pay a higher rate, in search of higher yields, much as they did at smaller banks.

Outlook for the Remainder of 2024

In answer to a query from Yahoo Finance on Friday, CFO Jeremy Barnum told reporters, “As customers move out of checking and savings, they may choose to go into CDs.” “That means that the bank is paying more for the internal migration.”

He continued, “That is the kind of deposits migration that we’re expecting” for the remainder of 2024. It is undoubtedly still true that the large banks will continue to be able to make large profits from lending and that they are better positioned than their competitors to weather a time of high interest rates.

For instance, Citigroup’s net interest income for the first quarter of 2024 exceeded forecasts by $1 billion, and JPMorgan increased its projection of net interest income for the entire year to $89 billion (excluding trading) from $88 billion.

However, in contrast to 2023, that was flat. For the entire year, Wells Fargo and Citigroup anticipate a decrease in their net interest income. Wells Fargo and Citigroup have also revealed that they are paying more for that funding than they did a year ago, adding to the pressure on deposit pricing.

Market Response and Economic Indicators

Due to hotter-than-expected inflation data this past week and an unexpectedly robust economy, investors are now less likely to expect a rate cut from the Federal Reserve in June, which is likely to increase pressure on them.

The average deposit fee for Wells Fargo was 1.74%, which was more than the 1.58% for the fourth quarter and the 0.83% for the same period last year. Overall earnings decreased by 7% from the previous year.

According to Wells Fargo Chief Financial Officer Mike Santomassimo, “rates might be higher than what people expected a week ago,” he informed analysts. “We do have to wait and see how clients are going to react.”

Citigroup increased the average rate it paid on deposits to 3.70% from 2.72% and 3.61% from the same quarter last year. Overall earnings decreased by 27% from the previous year.

Additionally, Citigroup gave some updates regarding the bank’s ambitious restructuring, which is leading to the loss of thousands of jobs. It said that as part of a goal to cut headcount by 20,000 by 2026, it has removed 7,000 posts.

JPMorgan’s overall earnings topped Wall Street estimates, up 6% to $13.4 billion from the previous year. Less money was set aside for potential loan losses, and investment banking fees increased by 21% to $2 billion, suggesting that Wall Street may be on the verge of a comeback.

Loan underwriting accounted for the majority of that rather than consulting work.
Regarding any increase in M&A activity, Barnum stated, “We are a little bit cautious.”

CEO of JPMorgan, Jamie Dimon, reiterated a topic he emphasized in his annual shareholder letter by issuing additional cautions over the path ahead for the US economy.

Cautious Outlook

“Many economic indicators continue to be favorable,” Dimon stated. “However, looking ahead, we remain alert to a number of significant uncertain forces.”

“Many economic indicators continue to be favorable. Looking ahead, nevertheless, we continue to be mindful of a number of important unpredictable forces.”

He listed “persistent inflationary pressures” that “may likely continue,” wars and geopolitical concerns, and the Federal Reserve’s strategy of quantitative tightening. According to Dimon, “Rates being higher on their own isn’t that important, what is important is why.”

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