JP Morgan, America’s largest bank, on Thursday reported a 28 percent fall in profits to $8.6 billion in the second quarter. The institute also temporarily suspended its $30 billion share buyback program. At Morgan Stanley, which also presented figures, net income in the quarter fell by 30 percent to $2.4 billion.
This has ushered in a new era on Wall Street. The banks were the big winners of the pandemic. They have benefited from government and Federal Reserve (Fed) bailouts worth billions, which have supported both consumers and markets. In the prior-year quarter in particular, many financial houses reported record numbers and benefited from a global boom in mergers and acquisitions and strong IPO business.
Now, however, a number of factors are clouding the mood. Investment banking at both institutions was weak. JP Morgan’s fees from the deal fell 54 percent, more than analysts had expected. The decline at Morgan Stanley was of the same order of magnitude. Analysts assume that other banks will paint a similar picture in the coming days. The business with mergers and acquisitions collapsed by 24 percent across the industry, according to calculations by the analysis house Dealogic.
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The mood is even worse for IPOs – once a lucrative business for financial institutions, especially in view of the once-popular and multi-billion dollar tech IPOs. But the rising interest rates have led to a crisis in the tech industry, which has actually only been going up since 2008. This is reflected in canceled stock exchange plans, significantly lower valuations and waves of layoffs. The war in Ukraine is also depressing the mood. As a result, the IPO market has practically ground to a halt.
JP Morgan felt compelled to increase loan loss provisions by $428 million as a result. That reflects a “moderate deterioration in the economic outlook,” the bank said. A year ago, the institute reduced three billion dollars in provisions for impaired loans because the consequences of the pandemic were less serious than feared.
High inflation, rising interest rates and the aftermath of the war in Ukraine “are very likely to have a negative impact on the global economy,” said bank chief Dimon. “We are prepared for whatever comes and will be there for our customers even in the most difficult times.” Dimon is the longest-serving CEO of a Wall Street bank and has already successfully led the institution through the financial crisis.
He also emphasized on Thursday that consumers, an important driver of the economy, are currently still in good shape. It is true that they would pay more with their credit and debit cards, and particularly in the lowest income brackets, it is noticeable that customers are increasingly using up their savings. But the failure rate is still very low at 1.5 percent.
Overall, however, the situation is inconsistent: the labor market has recently been surprisingly robust. In June, however, prices again rose more sharply than expected. Economists therefore expect the central bank to take an even tougher course. This in turn increases the risk of a recession, which tends to hit banks hard.
Investors reacted nervously to the quarterly results. JP Morgan stock was down a good four percent in early New York trading in an overall weak market and has already lost a third of its value this year. Morgan Stanley’s paper was down almost two percent and has lost around 27 percent since the beginning of January. Octavio Marenzi of capital markets consultancy Opimas called JP Morgan’s results “mixed and slightly disappointing”. There is “no clear direction for the bank as a whole, and it will probably stay that way for the next quarter or two.”
A ray of hope, however, was the trading business. JP Morgan was able to increase trading revenues by 15 percent to $7.8 billion. The volatility “helps stocks and bonds trade,” said Morgan Stanley’s chief financial officer, Sharon Yeshaya. Bond trading in particular was strong, up 49 percent year-on-year. Total retail sales rose 7 percent to $5 billion.
Citigroup is also expecting an upturn here. Trading sales at the bank, which reports its quarterly results on Friday, may have increased by more than 25 percent, analysts believe. “Volatility is our friend,” clarified Andy Morton, head of Citigroup’s capital markets business, at a conference in June. And volatility doesn’t just exist in one or two asset classes, but practically everywhere – in stocks, bonds and commodities.
The institutes are also getting tailwind from the interest rate hikes by the central bank. The Fed has already raised interest rates three times this year, sometimes unusually sharply. The key interest rate is now in a range of 1.5 to 1.75 percent. At the next session at the end of July, it could rise again by 0.75 percentage points or even a full percentage point.
This is leading to rising net interest income across the industry. This is the difference between the interest that banks pay on deposits and the interest on loans. JP Morgan posted an increase of 19 percent to $15.1 billion. Overall, however, investors must be prepared for further profit slumps at Wall Street houses in the coming days.
More: Groups from other sectors in the USA will also be presenting their Q2 figures in the coming days