Big US bank net interest income may have peaked after strong Q4'22

Fourth-quarter 2022 earnings were mixed at the four biggest U.S. banks, with both credit expenses and net interest margin expansion mostly exceeding analyst expectations.

Those two offsetting factors resulted in operating EPS for the banks coming in line or above consensus estimates. Year over year, the results were strong across several reporting lines, with increases in net interest income ranging from 22.7% at Citigroup Inc. to 48.5% at JPMorgan Chase & Co., driving operating revenues higher by 5.4% to 17.7% among the group, according to data from S&P Global Market Intelligence.

However, investors wavered over guidance that net interest income may have peaked for now. Credit metrics did not show too much deterioration, but all four banks took reserving action that indicated something worse ahead. Shares of the big four all moved higher on the day of their reports, but those gains compressed or turned to losses over the subsequent two trading days.

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Net interest income tops out

Higher interest rates continued to fuel rapid NIM expansion, with margins widening sequentially from 8 basis points at Citi to 38 basis points at JPMorgan Chase.

After NIMs surged over the course of 2022, each of the big four have forecast year-over-year growth in net interest income for 2023. But the guidance, wrapped in caveats about uncertainties over the future path of interest rates, pointed to a step down from annualized 2022 fourth-quarter levels, reflecting expectations for an end to Federal Reserve rate hikes and a catch-up in deposit pricing.

"The big emerging pressure point is [net interest income] degradation," Piper Sandler analyst R. Scott Siefers said in a Jan. 17 note. The fourth quarter of 2022 looks to have been a "high-water mark" for the group, Siefers said, adding that the "starting point for 2024 could be especially tough."

Reserving steps up

Credit loss provisions continued to escalate as the big banks set aside funds to cover potential bad loans under reserving scenarios that anticipate a mild recession in the near term.

Guidance also continued to describe an anticipated "normalization" to pre-pandemic loss rates, though that would involve a significant increase from recent levels. JPMorgan Chase projected credit card net charge-offs of 2.60% in 2023, up from 1.47% in 2022.

Bank of America Corp. said its criticized commercial loans increased $1.6 billion sequentially to $19.3 billion, driven by exposure to office commercial real estate. CFO Alastair Borthwick said the performance of those loans remains "OK," but the downgrades reflect higher interest rates and debt servicing burdens on borrowers. Wells Fargo & Co. CFO Michael Santomassimo similarly said it expects stress on office loans over time, though higher vacancy rates have not yet led to "significant loss content."

Overall, actual realized losses remained low, with net charge-off rates increasing six basis points to 13 basis points sequentially at JPMorgan Chase, BofA and Wells Fargo. The big four finished 2022 at reserve-to-loan ratios that were 60% to 71% of year-end peaks in 2020.

JPMorgan Chase's credit allowance reflects "something more than a very mild soft landing," CFO Jeremy Barnum said. "But of course, it wouldn't be appropriate to reflect a full-blown hard landing in our current numbers since the probability of that is clearly well below 100%."