Slowing demand and plunging markets have ended a period of record profits for the country’s biggest banks, but that doesn’t mean a recession is imminent, top bankers say, even if they appear to be preparing. for one.
On Thursday, JPMorgan Chase and Morgan Stanley reported lower earnings for the second quarter than for the same period last year.
JPMorgan set aside more money to cover possible credit losses and said it would suspend share buybacks. Morgan Stanley said it was taking a more cautious stance in response to the uncertain economic outlook.
But executives at JPMorgan, the country’s largest bank, said there were few, if any, signs that the US economy was slipping into recession. Retail banking customers continue to spend money on things they want but don’t need, such as travel and restaurants, and companies JPMorgan lends to are making greater use of some lines of credit. Those are two signs that economic activity has so far held up despite a rise in annual inflation, which hit 9.1 percent in June.
“We have taken a very careful look at our actual data,” Jeremy Barnum, the bank’s chief financial officer, said in a call with reporters. “There is essentially no evidence of real weakness.”
JPMorgan’s earnings were hit by falling share prices, slower investment banking activity and a weaker market for home loans. It is feeling the effects of interest rate hikes being made by the Federal Reserve to combat high inflation, which has unsettled financial markets. Jamie Dimon, chief executive of JPMorgan, said bankers were bracing for a potentially tough year.
“We are dealing with two conflicting factors, operating at different times,” Mr. Dimon said in a press release. “Uncertainty about how high rates need to be and never-before-seen quantitative tightening and its effects on global liquidity, combined with the war in Ukraine and its deleterious effect on world energy and food prices, are very likely to have negative consequences. in the global economy in the future.
JPMorgan earned $8.6 billion from April to June, down 28 percent from a year earlier but slightly higher than its first-quarter profit of $8.3 billion. It set aside new reserves largely for potential losses on its loans in its consumer business, reporting a provision for losses totaling $1.1 billion. The bank’s latest earnings missed analysts’ expectations and weighed on its shares, which fell more than 4 percent and dragged the broader market lower, with the S&P 500 shedding more than 1 percent.
But the bank is still issuing new credit cards, and card usage was 15 percent higher than last year. Spending on travel and dining was 34 percent higher.
For Wall Street, the fees the bank earned by providing investment banking services, such as advising companies on mergers and underwriting initial public offerings, fell sharply. They were 54 percent lower than a year earlier, contributing to a 26 percent drop in profit for his Wall Street business overall. But rapid and substantial changes in the prices of stocks, bonds and other financial products saw the bank’s revenue rise 15 percent from last year in its trading businesses, which thrive in times of volatility.
JPMorgan also announced it would suspend share buybacks, a way of distributing extra cash to shareholders, to build capital reserves more quickly to meet reconfigured requirements set by regulators. Mr. Dimon told reporters that without the new regulatory requirements, the bank would “probably” continue to buy back shares.
Morgan Stanley’s earnings also fell short of analysts’ expectations. The investment bank and investment firm’s profits fell nearly 30 percent in the second quarter from a year earlier, to $2.4 billion. Recent market turmoil halted deals and caused rates on stock and bond offerings to plummet.
However, the bank, unlike JPMorgan, announced a new share buyback, saying it planned to buy back up to $20 billion of the company’s shares, although the bank did not give a timeframe for the purchases. Past buybacks have raised issues with regulators, who worry in turbulent times that using cash to buy shares will deplete the capital banks have to cover credit losses.
In a conference call with analysts, James Gorman, CEO of Morgan Stanley, received pushback from some analysts about the buyback plan. Mike Mayo, who covers Wells Fargo banks, asked if it was time for the bank to switch to “Plan B” given the worsening economic outlook.
“It’s a challenging market, but I think it’s important to say that it’s not a difficult 2008.” Mr. Gorman said.
He suggested the bank would be more conservative in its expansion plans. “We’re in a bit of an uncertain world,” he said. “I don’t think this is the time to be too aggressive.”
Isabella Simonetti contributed report.