new York Jamie Dimon is preparing his investors for difficult times. JP Morgan on Wednesday reported a 42 percent slump in profit for the first quarter on a yearly basis and is raising loan loss provisions for the first time since the pandemic began to prepare for defaulting loans.
“We remain optimistic about the economy, at least in the short term,” the CEO said. “Consumers and corporate balance sheets are in good shape. But we see major geopolitical and economic challenges in the face of high inflation, supply chain difficulties and the war in Ukraine.”
Over the past year, Wall Street has benefited from a variety of trends, including IPOs known as spacs and a global boom in mergers and acquisitions. But the mood has changed in recent weeks. America’s largest bank is feeling the effects of high inflation, rising interest rates and the aftermath of the Ukraine war in a variety of ways.
Investment banking came to a virtual standstill with the start of the war. The volume of announced and completed mergers and acquisitions has fallen to its lowest level since the pandemic began a good two years ago, according to data from the analysis company Refinitiv. Investment banking revenue fell 28 percent to $2.1 billion in the first quarter.
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The granting of new mortgage loans fell by 37 percent in view of the significantly higher interest rates. Retail sales fell by three percent and, at $8.75 billion, were a good $1 billion higher than initially expected.
End of the golden phase
The quarterly figures “end the golden phase that we have experienced in banking over the past two years,” says Octavio Marenzi, head of the capital market consultancy Opimas. Significantly lower profits “will be the new normal for the foreseeable future.”
JP Morgan also posted a loss of $524 million attributed to its commodities business and the war in Ukraine. $120 million of that is attributable to the crisis in the nickel market. JP Morgan is a major lender to Chinese group Tsingshan, one of the world’s largest nickel and steel producers. He had to cancel bets on the metal’s price falling as a result of the war.
The lending business of the major US bank, on the other hand, rose. Loans were up 6 percent year-on-year, business loans were up 10 percent, and credit card debt was up 15 percent, a sign that US consumers are increasingly suffering from high prices.
Loan defaults are “currently at a historically low level,” emphasized CFO Jeremy Barnum. But the probability of defaults has increased in view of inflation. The same applies to the probability of a recession. Therefore, the bank must take appropriate precautions. Net income fell about five percent to $30.7 billion.
The stock was down a good three percent in early New York trading and has lost a good 20 percent since the beginning of January. In a bid to appease shareholders, Dimon announced a $30 billion buyback program that is scheduled to start in May.
JP Morgan was the first institute to give an impression of how the war and the new interest rate policy are affecting the US banking world. Goldman Sachs, Morgan Stanley, Citigroup and Wells Fargo will follow on Thursday.
It is already clear: the picture of the American banking landscape is complex. JP Morgan’s comparatively good trading volume “bodies well for other banks, especially Goldman Sachs and Morgan Stanley,” says Steven Chubak of Wolfe Research. However, the two Wall Street houses would also suffer from weak investment banking.
JP Morgan’s chief financial officer, Barnum, said it’s unclear whether IPOs and mergers and acquisitions will be pushed back just a few months or canceled altogether. “At the start of the quarter it was all about pushing deals. Now, however, interest rates are significantly higher and some sectors in the stock market are being revalued.” This could lead to plans being canceled completely.
Citigroup is particularly active in Russia
Analysts consider Citigroup to be the weakest of the big six banks. The institution, led by Jane Fraser, is in the midst of a restructuring phase and has to spend billions of dollars on better compliance systems. Citigroup is also particularly active in Russia and has already warned that, in the worst case, the bank could lose a good half of its nearly $10 billion exposure to Russia.
Tailwind, on the other hand, could come from the interest rate policy of the US Federal Reserve and “due to the increased demand for loans,” according to analysts at Morgan Stanley. At its most recent meeting in March, the Fed initiated a turnaround in interest rates and announced a series of further interest rate hikes for this year in order to combat the rapidly rising prices. At the next meeting in May, the monetary policymakers could raise the key interest rate by 0.5 percentage points – twice as much as usual.
That could significantly increase net interest income. It forms the income from interest on loans minus the interest paid on credit balances and other liabilities. JP Morgan has increased its expected surplus for this year from $50 billion to $53 billion.
Wells Fargo could also benefit from this with its large private customer business. But interest rates that are too high could hurt banks, Wolfe Research’s Steven Chubak warns, because they weigh on consumer sentiment.
The Fed’s aggressive interest rate policy also increases the likelihood of a recession. This opaque situation is also reflected in the stocks. The KBW bank index is down 13 percent this year, more than the broader S&P 500, which is down around 8 percent.
More: Exit of the Capital Group triggers price slides at Deutsche Bank and Commerzbank