2023-04-16 09:10:10 ET
Summary
- JPMorgan Chase & Co., Citigroup Inc., and Wells Fargo & Co. posted good, strong returns in the first quarter of 2023.
- These banks saw strong net revenue streams as they benefitted from the rising interest rates.
- These banks also showed a strength that smaller regional and local banks do not show, supporting confidence in the banking system even if smaller banks are having troubles.
- Moving into a recession will only strengthen this division in the banking system as the "big" banks seem to look like fortresses right now, whereas the smaller ones look weaker.
- Furthermore, the digital future is about to hit the banking system and JPMorgan Chase seems more ready for this transition than does any other bank, big or small.
The Federal Reserve has been fighting inflation for over a year now.
In early March, the U.S. experienced some bank runs and bank failures.
An economic recession in the U.S. is expected soon.
JPMorgan Chase & Co. ( JPM ) posted a return on equity ((ROE)) of 18 percent and a return on tangible common equity (ROTCE) of 23 percent. These are up from 13 percent and 16 percent a year earlier.
In the first quarter, profits were up by 52 percent over a year ago and revenues achieved a record level.
At Wells Fargo & Co. ( WFC ), the ROE was up to 11.7 percent from 8.7 percent a year ago, and at Citigroup Inc. ( C ), the ROE came in at 9.5 percent, up substantially from a year ago.
The ROTCE at Wells Fargo came in at 14.0 percent, up from 10.4 percent a year ago, and at Citigroup was 10.9 percent up from 10.5 percent a year ago.
And, all these results came with substantial increases in loan loss reserves, a precaution to protect the banks from a recession and other possible traumas coming up in the next year or so.
The three banks, together, added almost $2.0 billion in the first quarter to cover loan losses.
Biggest Cause
The biggest reason for this "knock-out" performance was the increase in the net interest income of the three banks.
The big banks benefitted from the effort of the Federal Reserve to raise its policy rate of interest. Net interest margins have grown substantially at all three banks.
Loan rates went up substantially throughout the year.
Deposit rates did not move much at all.
Loan rates rose because of the Federal Reserve's actions to raise interest rates.
Deposits rates did not rise because of all the money the Federal Reserve has pumped into the banking system over the past several years.
As stated in the Wall Street Journal:
"The glut in deposits they (the banks) have collected over the past several years means they aren't under as much pressure to increase deposit rates as some smaller banks.
As a consequence, JPMorgan's net interest income rose 49 percent to a record $20.71 billion. At Wells Fargo, it rose 45 percent and at Citigroup, it was up 23 percent."
Still, these big banks did raise deposits in the first quarter, but primarily in March as money flowed from smaller, regional banks due to the financial distress felt amongst these organizations.
However, all three big banks are not counting on keeping these deposits over time.
But, there you have it.
Together, the three big banks turned in more than $22 billion in profits in the first quarter than one year ago.
This turns out to be more than a third higher compared with last year, first quarter.
The combined revenue of the three big banks was up more than 19 percent from a year ago.
Numbers Turning Soft
Will this trend continue?
There is no clear answer to this question at this time.
A lot is going to happen over the next year or so.
Most bankers believe that a recession is going to appear in the near future.
Then there is the possible banking upheaval that might occur if the government jumps in and initiates a central bank digital currency.
These two alone substantially cloud the future of the banking industry and the financial system.
The general feeling is that the next two or three years are not going to be very kind to the smaller banks in the country.
The government talks about the importance of maintaining a banking system like the one we have, but, the evolving technology may not be right for the way that the financial system is progressing.
Small may be absorbed in larger and larger bank networks.
With all this going on and the economy being in such a disequilibrium it is hard to see exactly how this is going to work out.
Certainly, JPMorgan Chase is prepared to move into this new world.
I believe the results that JPMorgan Chase is posting are evidence of this preparation.
However, I am not as confident about Citigroup and Wells Fargo.
JPMorgan Chase & Co.
JPMorgan Chase has posted a return on equity in excess of 15 percent for quite a few years now.
Many would say that because of this performance, JPMorgan Chase has a competitive advantage that it keeps and sustains. That is why it earns a return on equity that is 15 percent or greater.
Jamie Dimon, JPMorgan's chief executive officer, has built the bank up to this level of excellence.
Furthermore, I believe that Mr. Dimon is fully ready to move JPMorgan into the age of digital currencies. Consequently, JPMorgan is more prepared, I believe, than any other "big" bank to enter the next stage of technological innovation.
And, JPMorgan Chase is more prepared to move onto the next stage of bank consolidation than any other bank in the United States.
Jamie Dimon has already moved to make JPMorgan Chase a "facilitator" of the move into banking consolidation. Note the lead that Mr. Dimon took in helping First Republic Bank in rescue talks and the leading role he is playing in bailing out smaller lenders.
JPMorgan Chase made an 18 percent return on equity in the first quarter of 2023.
JPMorgan's stock price rose 7.6 percent when the first quarter earnings were released.
Continue to keep an eye on Jamie Dimon and on JPMorgan Chase & Co.!
For further details see:
JPMorgan Chase And Other Big Banks Have Great First Quarter