Major American banks claim that even though the economy was faltering and consumers were acting more cautiously, higher interest rates increased their profitability.

Increasing U.S. Federal Reserve interest rates allowed JPMorgan, Wells Fargo, and Citigroup to charge more for loans while hiking rates on deposits more gradually, according to their quarterly reports. Citibank and Wells Fargo indicated that losses on credit cards and other loans were beginning to climb, and the banks said that consumers were beginning to deplete savings.

Since the failure of Silicon Valley Bank and two other lenders earlier this year, banks are restricting the flow of credit and increasing cash levels, making it more expensive for consumers and businesses to borrow money and repay debt.

Jane Fraser, CEO of Citigroup, reported that she was observing a persistent slowdown in spending, which she attributed to “an increasingly cautious consumer.”

Although delinquent rates were relatively low compared to historical levels, the third-largest U.S. lender said it has set aside extra money to cover failing loans.

According to Wells Fargo, its credit card portfolio is experiencing an increase in charge-offs, or debts that have been written off. According to Wells Fargo CEO Charlie Scharf, average customer and commercial loans decreased from the second quarter as higher rates and a weakening economy slowed loan growth.

“While the economy has continued to be resilient, we are seeing the impact of the slowing economy with loan balances declining and charge-offs continuing to deteriorate modestly,” said Scharf in the bank’s press release.

Meanwhile, local lender PNC Financial Services reported a rise in consumer credit defaults.

Bank executives also reaffirmed their concerns that broad new capital standards, which were announced in July, may restrict lending and force them to discontinue some products.

The picture, nevertheless, was not as bad as some institutions had first believed. The decision to release $113 million in net reserves was influenced, according to JPMorgan Chase, by the fact that its experts had earlier this quarter changed their outlook for the economy to modest growth for a few quarters into 2024 rather than projecting a slight recession.

While everything was going on, Citi and Wells Fargo announced lesser provisions for problematic loans than analysts anticipated.

In its results call, JPMorgan stated that consumer spending had now returned to pre-pandemic rates and was beginning to deplete savings.

“Currently, U.S. consumers and businesses generally remain healthy, although consumers are spending down their excess cash buffers,” said JPMorgan CEO Jamie Dimon.

Because they profited from higher interest rates, banks often reported increased net interest income (NII), which is the difference between what they make on loans and what they pay out on deposits.

The first, third, and fourth largest U.S. lenders, JPMorgan, Citigroup, and Wells Fargo, all raised their expectations for NII.

What you are seeing is that the big banks with highly varied operations had quite decent profitability, according to Eric Kuby, chief investment officer at Chicago-based North Star Investment Management Corp., which owns JPMorgan shares.

The results, according to Dimon, benefited from “over-earning” on NII, albeit that will eventually normalise. According to bank officials, the current NII levels are not sustainable.

PNC’s NII, in contrast, decreased. The bank claimed that rising funding costs more than offset higher rates on interest-earning assets.

All four major banks—JPMorgan Chase, Wells, Citi, and PNC—reported a drop in average deposits.

The banks also issued a warning over the regulators’ proposed increases in bank capital, which they claimed may render a number of their products and services unprofitable.

JPMorgan Chase and Wells Fargo stock prices both increased by 1% to 3%. PNC declined, and Citi’s stock closed marginally down, reversing an earlier gain. Regional lenders are included in the KBW index of bank shares, which fell 0.4%.

“Bank stocks have been priced for nothing but bad news for a while and have significantly underperformed,” said Rick Meckler, a partner at Cherry Lane Investments, a family investment office.

“Today is truly a relief rally where investors see the picture for the major money center banks is not as negative as they feared, particularly their outlook.”

(Adapted from LiveMint.com)