Biggest banks show resilience to large funding cost increases

The four biggest US banks weathered rapidly increasing funding costs well in the second quarter, delivering another set of earnings reports that appeared to defy the upheaval that has hit the industry in 2023.

Three banks raised their guidance on net interest income (NII) for the full year, while two notched sequential increases in net interest margins (NIMs), according to S&P Global Market Intelligence data. The results drove consensus revenue estimates for 2023 and 2024 higher for all four, and earnings per share estimates up for three.

The big banks reported deposit inflows during the peak of the turmoil in March, and analysts say they continue to benefit from being perceived as safe havens.

The strong performance came with caveats that the current NII is not sustainable, however. JPMorgan Chase & Co., which raised its 2023 NII guidance again to $87 billion, emphasized that its medium-term expectation is for somewhere at about $75 billion annually. "There is very little pricing power in most of our business, and betas are going to go up," Chairman and CEO Jamie Dimon said, referring to the relationship between deposit costs and underlying rates. "Take it as a given."

Better NII guidance

Wells Fargo & Co. also lifted its 2023 NII guidance by 14% over 2022, up from an increase of 10% announced previously.

Analysts had viewed prior guidance from JPMorgan and Wells Fargo as conservative and were on the lookout for upward revisions. Piper Sandler analysts said the two banks had among the most conservative NII guidance, while KBW researchers recommended Wells Fargo shares at overweight based on conservative guidance. Wolfe Research analysts had the same thoughts on JPMorgan's NII guidance and accretion of First Republic Bank assets.

Citigroup Inc. notched a 9-basis-point sequential increase in its NIM to 2.47%, and raised its 2023 projection for NII, excluding markets, to slightly above $46 billion from about $45 billion. It kept its revenue guidance steady, saying there would be an offset in lower noninterest revenue.

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Bank of America Corp. kept its 2023 NIM guidance steady at about $57 billion as its NIM compressed by 12 basis points sequentially to 2.06%. BofA's NIM reflects pressure from its debt securities portfolio, which has experienced a sharp drop in market value, and where the yield fell 14 basis points sequentially to 2.44%.

The performance came even as interest-bearing deposit costs marched higher across the Big Four, with sequential increases of 37 basis points to 44 basis points. The sequential increases were lower than in the first quarter, though betas for the second quarter increased to a range of 79% to 94% as the Federal Reserve slowed the pace of its rate increases.

Pretty quiet on the credit front

Credit loss provisions generally increased across the Big Four, with the banks citing factors like credit card loan growth. Wells Fargo increased its allowance by $949 million, in line with previous guidance, which also reflected its exposure to office real estate loans.

Overall credit performance stayed strong, however, and while allowance ratios moved up, they remained far below previous periods of stress such as early in the pandemic and during the Great Financial Crisis.

Three of the banks also showed further increases in accumulated other comprehensive losses, which reflect the negative impact of higher interest rates on the market value of available-for-sale investment portfolios.

Earnings nevertheless helped keep Tier 1 common equity ratios about flat despite shareholder distributions, as attention has increasingly turned to forthcoming regulatory proposals to tighten requirements.