US Banks Brace For Tough Times Even After Quarter’s Windfall

Three of Wall Street’s biggest banks just notched a record third-quarter haul — and issued a slew of warnings on everything from higher capital requirements and rising loan losses to the fallout from war.

(Bloomberg) — Three of Wall Street’s biggest banks just notched a record third-quarter haul — and issued a slew of warnings on everything from higher capital requirements and rising loan losses to the fallout from war.

Take JPMorgan Chase & Co., the country’s largest lender, which posted another quarter of record net interest income. It joined rival Wells Fargo & Co. in lifting its full-year forecast for such revenue amid rising interest rates while Citigroup Inc.’s rates and currencies traders had their best third quarter in at least eight years, driving firmwide revenue past analyst expectations.

All together, the three banks’ profits soared 34% to $22.5 billion, their best third quarter in history. Despite the windfall, executives continued to warn of an uncertain environment as they wrote off nearly $4 billion in bad loans, roughly double the amount of charge-offs they recorded a year ago. 

“We are facing so many uncertainties out there, you’ve just got to be very cautious,” JPMorgan Chief Executive Officer Jamie Dimon said on a conference call. “It’s just extraordinary issues we have to deal with. How do you prepare the company for that?”

Dimon said his firm has spent recent months wading through a 1,087-page proposal from regulators that would boost his firm’s capital requirements by 25%. For Citigroup, executives are forecasting a jump of 16% to 20%. 

Read More: Wall Street Bosses Lash Out Over Proposals for Higher Capital

Executives spent Friday morning fuming about the new rules, warning that the changes would likely force them to reconsider offering certain products or raise prices on others. For credit cards, the plans will force banks to set aside more capital if their customers have large unused credit lines. That could mean Citigroup has to reconsider the size of customer credit-card lines or increase fees it charges customers for using their cards, Chief Financial Officer Mark Mason said.   

Part of the proposal will require banks to hold more capital for certain types of trading and JPMorgan’s markets business will be expected to set aside 60% more capital, Dimon said. That could force smaller players out of the business and result in less liquidity, he said.

“We’re currently focused on advocating as aggressively as possible for the necessary changes” to the proposed capital rules, JPMorgan Chief Financial Officer Jeremy Barnum told analysts on a conference call. “Some of them are sort of very technical in nature, including things that we think might actually be mistakes.”

Costs Climb

Despite the uptick in charge-offs, all three firms posted provisions for credit losses that were less than analysts expected. Still, executives warned that credit costs will continue to climb past pre-pandemic levels in the coming quarters. 

At Citigroup, the firm expects write-off rates on both of its credit-card portfolios will rise by the end of the year. Consumers with low credit scores have started to show signs of weakness as inflationary prices continue to eat away at their savings, Mason said.

The firm now expects net credit losses in its branded card portfolio, which includes proprietary products such as Citigroup’s Double Cash card, to rise as high as 3.25%, while loss rates for the retail-services portfolio could reach as much as 5.5%. The retail-services portfolio includes store cards such as ones for Macy’s Inc. and Wayfair Inc.

“We’re seeing payment rates start to come down a bit,” Mason said on a conference call. “We’re also seeing the spend — if you will — the card-volume spend tick down in retail services in particular.” 

It’s not just consumer lending that’s got executives worried.

The coronavirus pandemic ushered in a new era of remote work, lowering office occupancies and fueling concern that commercial-property landlords may fall behind on their debts. Wells Fargo, the country’s biggest commercial real estate lender, said it has grown increasingly concerned about loans tied to office space after adding $333 million to its allowance for credit losses in the third quarter. 

Read More: Wells Fargo Tops Estimates, Boosts Net Interest Income View

“The office portfolio in particular in the commercial real estate portfolio is where we’re seeing weakness,” Chief Financial Officer Mike Santomassimo said on a call with reporters. “I think we will see some loss pickup in that portfolio over time.”

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