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In an early test of the effect the Federal Reserve’s big interest rate cut has had on the finance business, the verdict is: mixed.
Profits were down at JPMorgan Chase and Wells Fargo, two of the nation’s biggest banks, they reported on Friday, yet their results largely surpassed expectations. The results suggested the economy was in solid shape, in keeping with recent data on jobs and inflation, although bank executives warned of looming risks.
Banks are particularly sensitive to the Fed’s actions on interest rates, which affect how much lenders can charge on deposits and loans, among other factors. While the central bank’s outsize cut last month was a relief for consumers jostling for cheaper rates on loans for houses, cars and credit cards, it has been less clear how that will shake out for the lenders who made bumper profits while rates hovered at 20-year highs.
JPMorgan’s chief financial officer described a “Goldilocks” situation: While the bank said on Friday that mortgage applications had risen slightly after the Fed’s decision, the fact that the central bank slashed rates so much could been taken as a worrying sign for the economy.
JPMorgan, the biggest bank in the United States, earned nearly $13 billion in profit last quarter. While that was a bit less than in the same period last year, it was still higher than worried analysts had projected. Those concerns were based, in part, by JPMorgan warning analysts last month that their forecasts were too high.
Wells Fargo earned $5.1 billion last quarter, which was 11 percent less than last year but also better than what analysts had been expecting. The bank earned less on the difference between what it pays out in deposits and what it charges for loans, in part because customers moved their money to other institutions offering higher interest rates on accounts, the bank said.
Wells Fargo also reported a $447 million hit from having to “reposition” some of its investments in bonds, another reflection of the change in interest rates.
JPMorgan said that debit and credit card spending rose 6 percent last quarter, but it set aside more money to guard against cardholder defaults. The pattern was similar at Wells Fargo.
The banks’ stock prices rose on Friday, but their future prospects remained uncertain. The famed investor Warren Buffett has been paring his stakes in big banks, selling more than $1 billion worth of stock in Bank of America in recent months, including a slug of shares this week. (That bank reports earnings next week.)
A major risk hanging over the industry is the shaky state of commercial real estate, specifically loans to the landlords of office buildings, who have been struggling to collect rent since many tenants have adopted hybrid work arrangements.
Wells Fargo’s finance chief, Mike Santomassimo, said the bank’s office-building loans were still the biggest area of concern. That said, the percentage of commercial loans the bank did not expect to be paid back fell slightly in the latest quarter, a blip that Mr. Santomassimo said was not an indication of broader improvement. “This is going to take a while to play out,” he said.
There are also the effects of the intensifying war in the Middle East and a pivotal U.S. presidential election to fret about. The financial industry’s most vocal leader, JPMorgan’s chief executive, Jamie Dimon, per usual struck a harried note on Friday in prepared remarks, describing geopolitical conditions as “treacherous and getting worse.”
“The outcome of these situations could have far-reaching effects on both short-term economic outcomes and, more importantly, on the course of history,” he said.
What is he doing about it? Though the JPMorgan leader has been critical of executives who won’t take stands on public policy issues, Mr. Dimon wouldn’t answer questions about such topics on a call with reporters, demurring on the question of whether he had spoken with the two major U.S. presidential candidates and saying that he wouldn’t get into politics.
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