High Rates Have Been a Profit Machine For Banks. Not Anymore.

Some of the nation’s biggest banks said Friday the economy continues to look strong, but that they are starting to feel the pinch of higher-for-longer interest rates.

JPMorgan Chase, Wells Fargo and Citigroup all reported better-than-expected first quarter profits and revenues and executives said consumers and businesses are healthy. But they warned that their core lending incomes would be muted this year as higher interest rates force them to pay up for deposits, a pressure that no longer seems likely to ease soon.

JPMorgan said its first-quarter profit rose 6% to $13.42 billion, while Wells Fargo earned $4.62 billion and Citigroup earned $3.37 billion, down 7% and 27% respectively. Collectively, revenue rose 4%.

The Goldilocks economy has so far been a boon for the largest banks. American employers have continued to add jobs at a robust clip and consumers have continued to spend and borrow, even after the Federal Reserve raised interest rates at the fastest pace in decades. Companies flocked to the debt markets, too, and Wall Street began to emerge from a two-year slump in dealmaking.

“It’s quite clear the American economy is strong,” JPMorgan chief Jamie Dimon said on a call with reporters.

Citi chief executive Jane Fraser said a soft landing of the U.S. economy now appears more likely. Though, internationally she warned that “growth looks poised to slow in many markets.”

A vibrant economy can lift bank earnings in a number of ways. Market rallies increase the fees they pocket from managing money for individuals and institutions. Trading desks buzz with activity. Optimistic chief executives raise capital and opt for bold strategic moves, like mergers.

Confident consumers rack up purchases on their credit cards.

But the still-strong economy is also keeping inflation higher than hoped, forcing the Fed to hold interest rates up. Data this week seemed to remove expectations of a Fed rate cut in June, and the markets are reconciling with the likelihood that elevated rates are here to stay. Bankers said Friday that customers are moving more money around to chase those rates, which is going to eat into margins for the year.

A key profitability metric called net interest income—which measures the difference between what banks pay out on deposits and charge on loans—shrank on a quarterly basis at JPMorgan for the first time since 2021. It also fell from the last quarter at both Wells Fargo and Citigroup.

For the full year, JPMorgan expects that measure to be roughly flat. Wells Fargo and Citi expect it to fall.

“Rates might be higher than what people expected a week ago,” Wells Fargo Chief Financial Officer Mike Santomassimo said on a call with analysts. “We do have to wait and see how clients are going to react.”

Shares fell on Friday, with JPMorgan down more than 5% while Citi slipped 2%. Wells Fargo was little changed. The KBW Nasdaq Bank Index fell 1.3%

Loan performance

In the first quarter, JPMorgan and Wells Fargo released some of the reserves for potential loan losses they had set aside previously, signaling they are more confident the Fed can tame inflation without triggering a downturn.

There are signs that some Americans have become overstretched, after several years of high inflation and wage growth that has slowed. Consumers, particularly those with lower incomes, have started to deplete the cash they stashed away in the pandemic. Credit-card spending rose 8% at the three banks combined, but loans rose 13% because consumers are carrying higher balances.

Net charge-offs rose sharply from a year earlier at all three banks.

Mortgage businesses at the megabanks are still in the doldrums, even after a brief retreat in rates at the start of the year. First-quarter originations were up 16% at JPMorgan and down 38% at Wells Fargo, which said last year it would shrink its mortgage business. Citigroup said originations in the consumer bank fell 6%. Originations were sharply below prepandemic levels at all three banks.

Commercial real estate continues to be a point of stress for the banking system, although it is a proportionally larger problem for some smaller banks, which have invested a lot more into office and retail loans than big banks. JPMorgan Chief Financial Officer Jeremy Barnum said that the bank’s book of commercial real-estate loans wasn’t getting significantly worse, but still faced challenges.

“There’s no light at the end of the tunnel yet,” Barnum said.

The scale and diversity of the megabanks help them navigate good times and bad. But regional and community banks could reveal a deeper toll from higher interest rates next week, when they start to report first-quarter results.

Smaller banks are highly dependent on interest income. They are also under more scrutiny after the high-profile failures of three regional banks last year. In the fourth quarter, surprise losses at New York Community Bancorp revived concerns that commercial real estate could kick up another crisis.

In the first quarter, the biggest U.S. banks were hit again with special fees owed to the Federal Deposit Insurance Corp. for their share of the government’s response to last year’s regional-bank crisis. The banks had paid large bills last quarter too.

Investment banking gets a lift

On Wall Street, a flurry of activity in the debt markets in the first quarter helped lift fees. JPMorgan booked just over $2 billion in first-quarter investment-banking fees, up 21% from a year earlier, while Citigroup took in $977 million, up 32%.

But higher interest rates are also expected to hurt those operations. Yields on corporate bonds are heading up again as investors have pared back expectations of rate cuts this year. That means that fee income from debt issuance may head back down again.

To start the year, there has been an increase in announced mergers and acquisitions, boosting banker hopes of growth after several lean years. But fees come when deals are closed, and banks have yet to collect on their work. Meantime, a regulatory clampdown on big-ticket deals is convincing some companies to stay on the sidelines, JPMorgan’s Barnum warned.

“It’s a nice quarter of momentum, we’re just a little bit cautious,” he said.

Write to Gina Heeb at [email protected], Alexander Saeedy at [email protected] and Justin Baer at [email protected]