Banks should send Powell a thank-you note

Shareholders and chiefs of America’s big banks should get some thank you cards over to Jerome Powell.
The Federal Reserve’s interest rate increases have delivered a huge boost to revenue for Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. so far this year without – as yet – causing any problems for borrowers. Okay, the residential mortgage business has dried up and much of investment banking has been benched, but growth in net interest income is more than compensating.
NII is the difference between what banks earn on assets such as loans and how much they pay for deposits and other funding. In third-quarter results on Friday, JPMorgan and Wells Fargo reported NII up by more than one-third compared with the same period last year, while Citigroup’s was up by one-fifth. All three banks comfortably beat analysts’ expectations for interest income and more strong growth is forecast.
Importantly, it has kept the banks in positive territory: All other revenue combined shrank year over year for each of these banks. And even though everyone is convinced a recession is looming in some form, there isn’t yet any sign of it in the numbers.
The money banks are putting aside for potential bad loans is rising, but not to troubling levels. The provisions each made in the third quarter aren’t much different to the amounts they put aside in any quarter of 2019, before Covid-19 and rampant inflation.
There has been a big swing from the bad loan provisions that the banks were releasing this time last year, but the gains from higher interest income compensate.
Given the outlook, shouldn’t they be socking away more? The world is worried about recessions for a reason: Higher interest rates will start to hurt demand, that is after all the point, and so spending should fall and unemployment could rise. Jamie Dimon, chief executive officer of JPMorgan, said this week that consumers may start to run low on savings and feel the squeeze of higher living costs much more in about nine months’ time. That’s when credit problems could start to appear – or at least appear more likely.
US banks have to put money aside for all the credit losses they expect over the lifetime of a loan under recently introduced accounting rules – rules that Dimon hates, by the way. He told analysts that if unemployment got above 5%, that could mean the bank has to make another $6 billion of provisions over a couple of quarters. That’s not only because higher unemployment means more people will struggle with their credit card bills, but also because it increases the probability that the economy will deteriorate further. It makes unemployment of say 8% more likely that it looks today.
That $6 billion figure compares with $1.5 billion in provisions for the third quarter this year and $10.5 billion in the second quarter of 2020, which was the peak for Covid-related provisions, most of which were never needed. Dimon doesn’t like the rule because it makes earnings more volatile and doesn’t reflect actual losses.
—Bloomberg