Profits of large US banks soar, but there are warning signs

The largest banks in the United States ended the second quarter with the highest profits in three years thanks to the recovery of investment banking fees and extraordinary capital gains. These factors counteracted the pressure on the interest margin derived from the higher price of liabilities, new contributions set aside for potential bailouts, and costs that are growing more than expected. The aggregate profit of the six most prominent lenders (JPMorgan, Bank of America, Wells Fargo, Citigroup and Morgan Stanley) has shot up 17% to $38.5 billion in the second quarter of the year, according to their newly presented earnings reports.

The aggregate result is somewhat distorted by the extraordinary capital gains achieved by JPMorgan, the largest bank in the United States, from the sale of Visa shares. The group led by Jamie Dimon achieved a historic net income of $18.2 million, up 25% from the same period a year ago, thanks to an exchange of shares in the credit card giant that provided just under $8 billion in gains, and despite allocating $1 billion of those capital gains to the bank’s foundation.

The aggregate result of the six banking groups remains somewhat below what they achieved in the first quarter of 2021, in the heat of the recovery from the Covid pandemic crisis, when their investment banking businesses and their profits in bond trading and stocks allowed the big Wall Street banks to achieve record profits.

Banks have risen sharply on the stock market in 2024 due to optimism regarding a possible rate cut by the Federal Reserve and the strength of the economy. They have also been helped along by the possibility of relaxing restrictive regulatory proposals, as admitted by Federal Reserve Chairman Jerome Powell in his recent appearances in Congress. JPMorgan is trading at historic highs and has exceeded $600 billion in market capitalization after appreciating 22% so far this year. Goldman Sachs and Morgan Stanley are also at highs and the other three entities are also up strongly for the year.

One of the drivers of profits is the recovery of profitable investment banking fees. These soared 42% to $8.8 billion, with general increases across all groups. Goldman Sachs and Morgan Stanley, the most dependent on that line of business, have taken advantage of this circumstance, although JPMorgan stands out, emerging as an outstanding leader in that business as well. At Goldman, quarterly profit skyrocketed 170% to $2.9 billion, not only due to these fees but also compared to the terrible second quarter of last year, with losses in the commercial and consumer real estate business. Morgan Stanley improved its profit by 9% to $3 billion, thanks to the 51% increase in its investment banking fees.

Traditional business

Where there are more signs of concern is in the traditional lending business. Although the good performance of the economy is keeping defaults at bay, the interest margin is suffering and, in fact, is falling in most individual banks and as an aggregate figure, in a trend that was already on display in the first quarter. This margin increased with the rise in interest rates, which the banks have been transferring more quickly to loans than to deposits. However, rates have not risen for a year and financing has become more expensive as clients demanded to make their money more profitable and other sources of financing also increased their cost. Net interest income fell at Wells Fargo, Bank of America and Citi. If JPMorgan escaped unscathed, it was largely due to the incorporation of First Republic.

The other point of concern is rising costs on different fronts. On the one hand, the contributions to the Federal Deposit Insurance Corporation (FDIC) that were made last year have not been sufficient to handle the bailouts of the financial groups that failed last year (Silicon Valley Bank, Signature Bank and First Republic), so there are new contributions that affect the entire sector depending on size. The largest additional bill is borne by JPMorgan ($725 million), Bank of America ($700 million), Wells Fargo ($336 million) and Citi ($285 million). On the other hand, banks have to face fines, customer reparations and other regulatory disbursements, which especially affects Wells Fargo and Citigroup. Added to this are higher general and personnel costs due to increases in salaries in an inflationary context.

The most negative surprise on the side of non-financial expenses featured Wells Fargo, which warned that it now expects these expenses to shrink by only 2.8% to $54 billion for the year as a whole, compared to a previous forecast of $52.6 billion. In the second quarter, the entity’s profit fell 0.5% to $4.91 billion, due to the decrease in interest margin and the increase in costs.

Citi contained expenses in the quarter, allowing it to increase profits by 10% to $3.3 billion. However, it warned that it is likely that annual costs will be at the upper end of the expected range, from $53.5 billion to $53.8 billion. In any case, it would be a cut compared to the $56.4 billion of 2023.

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