We are into the third quarter earnings season and Wells Fargo and JPMorgan Chase have reported their earnings. Here’s what these two banks said during their quarterly earnings report.
JPMorgan which is the largest US bank reported revenues of $33.49 billion which was above the $32.1 billion that analysts were expecting. The bank’s net interest income came in at $17.6 billion in the quarter, 34% higher than the corresponding quarter last year.
Notably, analysts expect US banks to report strong net interest income in the quarter as US interest rates have spiked leading to the expansion of net interest margin for banks. However, slowing investment banking revenues and loss on bond portfolio are two of the headwinds for banks.
JPMorgan reported a loss of $959 million on securities in the quarter as compared to a loss of $256 million in the corresponding quarter last year. Also, the bank made a $1.53 billion provision for credit losses. In the third quarter of 2021, JPMorgan Chase released a similar amount from loan reserves.
Notably, US banks added billions to credit loan loss reserves in 2020. However, as the economy staged a V-shaped recovery, banks released some of these reserves in 2021. With the US economy yet again showing signs of stress, banks are yet again adding to their loan loss reserves.
Jamie Dimon of JPMorgan Predicted a US Recession
Earlier this week, JPMorgan’s CEO Jamie Dimon said that he expects a US recession in the next six to nine months. Some of the other business leaders have also expressed concerns over a US recession amid Fed’s rate hikes.
In the earnings release, Dimon said, “There are significant headwinds immediately in front of us – stubbornly high inflation leading to higher global interest rates, the uncertain impacts of quantitative tightening, the war in Ukraine, which is increasing all geopolitical risks, and the fragile state of oil supply and prices.”
JPMorgan posted an EPS of $3.12 in the quarter which was higher than what analysts were expecting. Notably, both JPMorgan Chase and Wells Fargo were once part of Warren Buffett’s portfolio. However, the “Oracle of Omaha” has exited both companies and instead added Citigroup shares this year.
Buffett has mostly been overweight on banking and financial stocks and Bank of America is Berkshire Hathaway’s second-largest holding. We have a guide on buying bank stocks.
Wells Fargo Stock Also Rises despite Mixed Earnings
While JPMorgan beat both the topline and bottomline estimates, Wells Fargo posted mixed earnings. Wells Fargo reported revenues of $19.50 billion in the third quarter which was higher than the $18.8 billion that analysts were expecting. However, its EPS of 85 cents trailed analysts’ estimate of $1.09.
Many brokerages agree that Wells Fargo is among the best-placed banks amid higher interest rates. Commenting on the bank’s third-quarter performance, CEO Charlie Scharf said, “Both consumer and business customers remain in a strong financial condition, and we continue to see historically low delinquencies and high payment rates across our portfolios.”
He however cautioned, “We are closely monitoring risks related to the continued impact of
high inflation and increasing interest rates, as well as the broader geopolitical risks, and while we do expect to see continued increases in delinquencies and ultimately credit losses, the timing remains unclear.”
JPMorgan Analyst Says Loan Loss Reserves Would Dampen Bank Earnings
Like JPMorgan, Wells Fargo also made a higher provision for loan losses which it attributed to loan growth and a “less favorable economic environment.”
JPMorgan Global Market Strategist Jordan Jackson believes that US banks would report a buildup in loss reserves amid the deteriorating US economy. The world’s largest economy contracted in the first half of 2022 and the economic outlook has got murkier amid sticky inflation.
The September inflation report was worse than expected. While US stocks plunged after the CPI was released yesterday, they eventually recouped losses and closed in the green. There are some investments though which can do well in periods of high inflation.
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