Some of the largest U.S. banks got a profit boost from higher interest rates and pointed to early signs of recovery in investment banking, but warned of stress among consumers and that losses would increase in commercial real estate.
In their earnings on Friday, JPMorgan Chase JPM.N and Wells Fargo WFC.N reported sharp increases in net interest income, which measures the difference between what banks earn on loans and pay out on deposits, that drove up profits.
Citigroup(C.N), meanwhile, said profit tumbled 36% in the second quarter as weakness in the bank's trading business blunted gains from its personal banking and wealth management.
There was a muted response from investors. JPM's shares rose 0.5%, Wells' shares were flat, while Citi fell 2%.
U.S. consumers still have a healthy balance sheet, the banks said, but warned spending was slowing and there had been a modest deterioration in some consumer debt.
"The U.S. economy continues to be resilient," JPMorgan Chief Executive Jamie Dimon said. But he added that consumers are "slowly using up their cash buffers."
On a conference call, the largest U.S. bank's chief financial officer, Jeremy Barnum, said loan growth demand is muted apart from cards and auto segments. The CFO added that the bank was seeing "green shoots" in trading and investment banking but it was too early to call a trend.
There have been growing worries around the health of the U.S. economy against a backdrop of aggressive interest rate hikes by the Federal Reserve and high inflation. Investors have worried that high interest rates could push the economy into a recession, but the outlook remains uncertain.
Wells CEO Charlie Scharf said the range of scenarios for the economy should narrow over the next few quarters. For now, the economy is performing better than many expected but will likely continue slowing.
Wells said consumer charge-offs, meaning debts that a bank has written off and does not expect to recover, continued to modestly deteriorate.
Citi, in addition, flagged that delinquency rates in credit cards and other retail lines are rising and expected to reach "normal levels" by the end of the year.
Separately, Larry Fink, BlackRock's chairman and chief executive officer, said in an interview with CNBC after the asset manager reported earnings that he expects the economic environment to remain challenging. "Inflation will be stickier than market is assuming," he said, adding it will bounce around 2% and 4%.
Both JPMorgan and Wells Fargo set aside more money for expected losses from commercial real estate loans, in the latest sign that stress is building up in the sector.
Wells reported that provision for credit losses included a $949 million increase in the allowance, mainly for potential losses in commercial real estate (CRE) office loans, as well as for higher credit card loan balances.
"While we haven’t seen significant losses in our office portfolio to-date, we are reserving for the weakness that we expect to play out in that market over time," Scharf said.
Bank of America (BAC.N) and Morgan Stanley (MS.N) will announce their results on July 18, followed by Goldman Sachs (GS.N) on July 19.
