NEW YORK, April 14 (Reuters Breakingviews) - In his lengthy letter to JPMorgan (JPM.N) shareholders this month, Jamie Dimon suggested that when his investors see the American flag, they should say thank you. While the original sentiment may have come from Berkshire Hathaway (BRKa.N) boss Warren Buffett, Dimon was dead right to apply it to the banking industry too.
JPMorgan, Wells Fargo (WFC.N), Citigroup (C.N) and PNC Financial Services (PNC.N) all reported a surge in profits for the first quarter on Friday, driven mostly by the unprecedented rise in U.S. interest rates over the past year. Dimon’s firm makes an average 4.7% yield on interest-earning assets, compared with a cost of interest-bearing deposits of just 1.9%. JPMorgan has passed on just 40% of the rise in benchmark rates to those savers. Wells Fargo has managed to keep even more for itself, passing on just 26%.
Big banks are operationally complex, yet for earnings purposes they’re essentially rent-seeking interest-income machines. Dimon’s bank has raised its target for net interest income by nearly 10% to $81 billion for this year and said it will stay north of $70 billion for a while. That’s not only a record – it’s more than the bank’s entire revenue in 2007, when rates were last this high. And it comes at negligible cost: JPMorgan hasn’t shifted its expenses forecast for the year. All that makes it easier to ignore less flattering developments such as the 19% fall in year-on-year investment banking fees, and the flat trading revenue, a trend broadly replicated at Citi.
A string of mid-sized bank failures has also left the giants predictably unruffled. American lenders overall lost $600 billion of deposits over the first quarter of the year, but JPMorgan’s balances increased by a net $33 billion. Finance chief Jeremy Barnum reckons $50 billion of deposits flowed into his bank and stayed put, more than offsetting other outflows. PNC’s deposits were flat. Wells Fargo’s dropped, but a 2% fall isn’t bad for a lender with a prior record of defrauding customers for years.
The people driving these firms – Dimon, Citi chief Jane Fraser and Bank of America (BAC.N) boss Brian Moynihan, who will report earnings next week – deserve credit, and they get it via generous compensation packages. But the real props go to their monetary and regulatory pit crew. It’s the Federal Reserve that engineered rising rates, low levels of customer defaults, and capital and liquidity buffers that make failure of these banks unthinkable. Elsewhere in Dimon’s letter, he describes himself as a “red-blooded, patriotic, free-enterprise and free-market capitalist.” Investors may lap that up, but his bank’s earnings show other forces at work too.
CONTEXT NEWS
JPMorgan, Wells Fargo, Citigroup and PNC Financial Services all reported a surge in earnings for the first quarter of 2023, as the benefit of higher interest rates offset rising charges to cover future bad debts.
JPMorgan, the biggest U.S. lender by assets, reported $12.2 billion of quarterly earnings attributable to common shareholders, a 55% increase on the same period a year earlier. The bank run by Jamie Dimon took a $2.3 billion charge for bad debt, compared with $1.5 billion in the previous first quarter.
The bank’s deposits increased by $33 billion between Dec. 31 and March 31, the period during which three mid-sized firms – Silvergate, SVB Financial and Signature Bank – all failed, causing a wave of deposit movement toward larger lenders.
Wells Fargo reported $4.7 billion of earnings, 34% higher than the previous first quarter, and took a $1.2 billion quarterly provision for credit losses. Citigroup reported $4.3 billion of earnings, a 7% annual increase, while smaller rival PNC made $1.6 billion, an 18% increase.
