The veil is being lifted on problems at major US banks
America's major banks face a tough battle after a weak start to the second quarter earnings season. Few industry leaders express this as clearly as Jamie Dimon, CEO of J.P. Morgan. He fears that inflation might remain higher than economists expect, with the expanding US fiscal deficit underpinning his concerns. Even if the Federal Reserve lowers interest rates in 2024, they are likely to stay in problematic ranges.
The largest banks are now caught in a serious competition for deposits. Declining net interest margins illustrate the problem. Wells Fargo anticipates an 8-9% drop in net interest income for 2024. Instead of addressing investor expectations directly like Dimon, Wells Fargo uses vague language, citing uncertainty about the factors affecting interest income.
Credit costs are rising
Citigroup CEO Jane Fraser emphasises progress made in reorganising the bank, despite recent regulatory troubles due to data management issues. The significant increase in credit costs, particularly in the card business, which requires higher provisions, receives less attention.
However, Dimon’s peers on Wall Street must recognise that these issues concern investors. Universal banks can't distract from interest rate and credit problems with a recovery in investment banking, or new buyback programmes, following the recent Fed stress test.
Massive card losses threaten
The optimistic facade built up by executives like Fraser is collapsing. The stress test results are less reassuring than industry leaders suggest. While capital ratios of the largest U.S. banks would remain above minimum requirements in a severe recession, these requirements will increase post-stress test. The focus is now on the significant potential losses, especially in the card business, that the Fed warns could hit the banks. Leading US banks must closely examine their practices in this segment.
