Big US banks reap bumper profits as Federal Reserve rates rise

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The three biggest US banks reported a rise in profits from charging more for loans, as the Federal Reserve’s interest rate hike strengthened their bottom line.

JPMorgan Chase, Citigroup and Wells Fargo collectively earned $49 billion in net interest income in the second quarter, which is the difference between what banks pay for deposits and what they earn from loans and other assets.

The figure was 30 percent higher than the same period last year and shows how some lenders have been able to access cash since the Fed’s tightening began in March 2022.

Although they charge more for loans, the biggest banks have managed to avoid overpaying depositors. The biggest US bank JPMorgan raised its forecast for full-year net interest income to $87 billion from $84 billion. Chief Financial Officer Jeremy Barnum attributed the higher rates “combined with lower deposit revaluations than previously expected”.

JPMorgan’s deposits rose 1 percent to $2.4 trillion during the quarter, boosted by its acquisition of failed regional lender First Republic in May. Barnum told analysts that the bank’s net interest income is not sustainable at current high levels and will eventually come down “due to increased competition for deposits”.

Chief executive Jamie Dimon said that “there is no situation in the history of banking that we have ever seen” where competition in a rising rate environment has not intensified, either from other banks or from alternative products such as money market funds. “We have to compete for it. You’ve already seen it in some parts of our business and not in other parts.”

Not all US banks have benefited that much. While depositors have favored the biggest banks in the flight to quality, smaller banks have come under greater pressure to boost deposit rates, which has hit their profit margins.

Custodial bank State Street, whose customers lean toward larger institutions that often chase better savings rates, warned Friday that it was paying customers higher interest rates to keep deposits, Due to which its shares have fallen by 10 percent.

The downside of rising rates has put pressure on borrowers across the economy, especially as concerns about loan defaults in commercial real estate have risen. JPMorgan also set aside net $1.5 billion in reserves to cover potential loan losses in the second quarter.

The bumper loan profit offset a decline in investment banking fees, which were down 6 percent for JPMorgan to $1.56 billion and down 31 percent for Citi at $686 million.

“The long-awaited boom in investment banking has yet to materialize, making this quarter a disappointing quarter,” said Jane Fraser, Citi’s chief executive.

Overall, JPMorgan said net income rose 67 percent year-over-year to about $15 billion, far better than analysts’ estimates. Wells, the country’s fourth-largest lender, said its profit jumped more than 50 percent from a year earlier to nearly $5 billion. Citi’s profits fell by more than a third due to slow corporate spending, a lack of deals and a costly period of layoffs.

Wells told shareholders that net interest income should grow about 14 percent this year from 10 percent previously, and Citi forecast net interest income to exceed $46 billion, up from an earlier forecast of $45 billion.

Rivals Bank of America and Morgan Stanley announced results on Tuesday, while Goldman Sachs disclosed earnings on Wednesday.