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In their first quarterly earnings reports since the Federal Reserve slashed interest rates last month, big banks are giving investors a glimpse into how they are preparing for a new, potentially less friendly macroeconomic landscape.
“Events at the tail end of [the third quarter] set the stage for crucial strategic pivots in banking, so the outlook is what to watch this earnings season,” said Chris Stanley, Banking Industry Practice Lead at Moody’s (MCO+1.41%) in a statement Friday.
The biggest boost this quarter was in banks’ investment banking divisions, which have been on a hot-streak as pickup in mergers and acquisitions give banks massive windfalls from advisory fees.
But investors and analysts are continuing to keep a close eye on net interest income — what banks make from interest on loans and investments. It’s an extremely rate-sensitive metric, the key way banks make money, and one of the biggest signals as to banks’ macro expectations.
Despite a slowdown in NII growth (and, in some cases, a decline in the metric) last quarter, banks have largely fallen in line with — or exceeded — expectations, both when it comes to their third-quarter NII and forward-looking guidance.
“I think the overall path has been somewhere between pretty good and quite good,” said Douglas Cohen, managing director at Fiduciary Trust International.
With Wall Street largely expecting the Fed to carry out two 25-basis-point cuts before the end of this year — a far cry from the six or seven projected in January — here’s what JPMorgan Chase (JPM+1.49%), Bank of America (BAC+0.43%), Citigroup (C+0.63%), and Wells Fargo (WFC+0.90%) are planning and projecting.
JPMorgan Chase
JPMorgan reported another blowout quarter Friday, topping Wall Street expectations thanks to higher-than-expected NII, which was up 3% year-on-year to $23.5 billion.
The largest U.S. bank by assets also raised its NII outlook to $92.5 billion end of this year, but expects that to drop off to about $87 billion, excluding markets, for 2025. The trough for the metric could hit in the middle of next year, according to chief financial officer Jeremy Barnum.
JPMorgan also reported revenue of $42.7 billion, up 7% from a year ago. Net income fell 2% to $12.9 billion, or $4.37 per share. And net interest income, a key way banks make money and a metric that’s highly sensitive to interest rates.
Another important factor given the start of the Fed’s rate-cutting cycle is consumer deposits, which currently appear to be in a trough, Barnum said. The mix of consumer deposits and balances, and the bank’s ongoing expectations for this metric, will help get rid of some of the leftover challenges, which could mean an uptick heading into next year, he said.
The bank also saw a pick-up in mortgage applications and a tiny bit of momentum in refinancing, as well as hints of additional activity in multifamily lending, as mortgage rates fell from highs in 2023 and at the beginning of this year.
“But you know, these cuts were very heavily priced,” Barnum said. “The curve has been inverted for a long time, so to a large degree, this is expected. So it’s not obvious to me that you should expect immediate dramatic reactions, and that’s not really what we’re seeing.”
Bank of America
Bank of America, the second-largest U.S. bank by assets, saw NII fall 3% year-over-year to $14.0 billion, driven by higher deposit costs. That’s still an increase of 2% from the second quarter, however, as fixed-rate asset repricing helped drive a bit of growth.
CFO Alastair Borthwick noted that the bank had expected the second quarter to be a trough for NII, but that it would pick up in the latter half of the year. Third-quarter figures were largely in line with those projections, and Borthwick said the bank is positioned to grow NII again in the fourth quarter, which will set it up well going into 2025.
But, he said, the larger-than-expected rate cut in September “hurt us a little more” than expected, Borthwick said.
“The 50-basis-point rate cut in September also negatively impacted NII,” Borthwick said. “With regard to a forward view of NII there are obviously several variables at play in the fourth quarter, and we still expect fourth quarter NII to grow and we expect it to be $14.3 billion or more on a fully tax equivalent basis.”
That’s based on a scenario that includes a 25-basis point cut in November and another 25-point cut in December. A 100-basis-point decrease over the next 12 months would result in a $2.7 billion hit to NII, Borthwick said.
All in all, however, Bank of America noted consistent consumer spending and other banking activity, in line with a healthy consumer.
“We feel good about the stability of the consumer at this point,” CEO Brian Moynihan said.
The bank’s net income fell 12% from a year ago to $6.9 billion, or $0.81 per share. That was on revenue of $25.49 billion, which grew less than 1% year-on-year.
Citi
Citi’s NII excluding markets fell 2% from last year to $11.96 billion for the quarter, and was down 1% on a quarterly basis. The bank said it’s expecting the metric to stay relatively flat through the end of the year, and didn’t yet issue guidance for next year.
“From a tailwind point of view, I would expect to see continued volume from loans,” CFO Mark Mason said.
He noted, however, that Citi’s interest rate sensitivity skews more towards non-U.S. markets. Much of the third-quarter declines were driven by lower interest rates in Argentina.
Mason also underscored that to reach its medium-term targets, the bank is expecting continued growth in NII and NIR, or the nominal interest rate: the percentage that a bank charges on loans. At Citi, however, NIR will be a slightly more weighted metric, he said.
Net income of $3.2 billion, or $1.51 per share, decreased from $3.5 billion, or $1.63 per share in the prior-year period, primarily driven by higher cost of credit. Revenues were down 1% to $20.32 billion from $20.14 billion a year ago.
Wells Fargo
Wells Fargo similarly saw NII take a hit this quarter. It posted $11.69 billion in NII, an 11% decrease from the same quarter last year. The bank projected fourth-quarter NII to be roughly in line with the third quarter, implying an approximately 9% decline in full year 2024 NII compared with a year ago.
In response to the rate cuts, Wells said it has already reduced rates on promotional deposit offers in its consumer businesses and that pricing on sweep deposits in advisory brokerage accounts will continue to move in line with the rate cuts.
“On the deposit side, I think we’ll make the decisions we think are the right decisions product-by-product and client-by-client, based on the relationships we have,” CFO Michael Santomassimo said in a call with analysts. “And I think so far again that’s worked out well for us. So that’s the approach we’re going to continue to take.”
Overall revenue fell to $20.37 billion from $20.86 billion a year ago. Net income fell to $5.1 billion, or $1.42 per diluted share, from $5.77 billion, or $1.48 per share last year.