analysis
The rise in interest rates has brought record profits to major US banks. While the high interest rates are weighing on large parts of the economy, banks in the USA in particular are benefiting from them. But how sustainable is the profit?
The high key interest rates are giving major US banks a strong boost in profits, as a look at the recently announced quarterly figures shows. JPMorgan, Wells Fargo and Citigroup made a combined profit of $22 billion last quarter, up 37 percent from a year ago. The big US banks are traditionally the first to open their books at the end of a quarter, thus heralding the accounting season.
Industry leader JP Morgan Chase performed best. The largest US money house increased its surplus in the three months to the end of June compared to the previous year by 67 percent to 14.5 billion dollars. Earnings increased by a good third to $41.3 billion – and thus at an even faster pace than at the start of the year. JP Morgan thus beat analysts’ estimates for both stocks.
banks in optimal business environment
Banking professor Christina Bannier from the Justus Liebig University in Gießen analyzes that the banks are currently in an optimal business environment due to the rise in interest rates at the central banks and the persistently high level of interest rates. “US banks make money on the so-called interest rate differential. That’s the difference between what the banks pay on their customers’ deposits and what they earn on lending rates.” In other words, the banks charge higher interest rates for the loans they grant than they pay savers for their deposits. According to Bannier, this margin is even higher in the USA than in Germany.
Top dogs benefit from loss of trust
In addition, JP Morgan Chase took over the failed First Republic Bank, which brought the big bank a profit of 2.7 billion dollars. In a bidding process orchestrated by the US government, JP Morgan took over the insolvent bank at the end of May, thereby gaining new customers, branches and deposits in one fell swoop.
From the point of view of banking expert Bannier, the banking crisis in spring primarily strengthened the top dogs. Because many unsettled customers would have withdrawn their deposits from smaller financial institutions and paid them into accounts with the big banks, even if they paid significantly less interest than the regional banks. But trust in the big banks is stronger because they are more strictly regulated and are therefore considered to be safer.
According to the founding director emeritus of the Leibniz Institute for Financial Market Research, Jan Pieter Krahnen, the classic banking business with loans and customer deposits is currently a source of profit for US banks, especially since customers for financial services in the US pay significantly more than in Germany and Europe, according to Krahnen. Banking professor Bannier said opposite tagesschau.de: “As long as interest rates remain high, business for US banks should continue to go just as well.”
Strong confidence in the US economy
The fourth-largest US bank, Wells Fargo, also benefited from the higher interest rates. It also raised its forecast for net interest income. “The US economy continues to develop better than many expected,” said Wells Fargo boss Charlie Scharf. Still, the bank increased its loan default provisions to $1.7 billion from $580 million a year earlier.
According to the banking experts, defaulting loans are a risk, but Krahnen raises concerns: “Despite all the prophecies of doom, the lending business is not weakening, and there have been no large-scale defaults so far.” Referring to the US economy, JP Morgan Chase CEO Jamie Dimond said, “Consumer balance sheets are healthy and they’re spending, albeit at a slightly slower pace.” Bannier interprets the consumer behavior of the Americans as follows: “People dare to consume, confidence in their own economy is strong.”
Credit balances weakness in business investment banking out of
At banks, gains in lending offset continued weakness in investment banking; things are not going so well there because of the rise in interest rates. According to banking expert Bannier, the high interest rates are a burden for many companies. They therefore remained cautious when it came to issuing bonds, IPOs or possible takeovers: areas in which the large investment banks made excellent money during the corona pandemic, when interest rates were still extremely low.
Citigroup didn’t fare quite as well as JPMorgan and Wells Fargo. The institute, which has a strong capital market business, also benefited from the rise in interest rates, but struggled with many other problems in the second quarter, such as the weak business in bonds, equities and commodities. Profits fell 36 percent year-on-year to $2.9 billion. Revenue fell 1 percent to just over $19 billion. In addition, the bank, which is the second largest issuer of credit cards in the world, had to increase provisions for loan defaults significantly.