Banking crisis? What banking crisis?

That was the message delivered by some of the largest US lenders on Friday as they discussed their performance during one of the most challenging periods for the banking industry since the 2008 financial crisis.

JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and PNC (PNC) all reported surging revenue and profits in the first quarter even as regulators seized some regional lenders and panic spread across the financial system in March. Their top executives offered multiple assurances that the worst was over.

“We've had a rough spell in March but things were looking better now," JPMorgan CFO Jeremy Barnum told reporters. His boss, CEO Jamie Dimon, said “you've already seen things calm down quite a bit.” Citigroup CEO Jane Fraser added: “Our banking system as a whole is very strong.”

Dimon was, as ever, the most emboldened among bank executives who met with Wall Street analysts on Friday, at one point chafing at a question about a "credit crunch" facing the system following the collapse of three US banks last month.

"I wouldn't use the word credit crunch, if I were you," Dimon said. "Obviously, there's going to be a little bit of tightening. And most of that will be around certain real estate things."

Some analysts who follow the industry agreed. Wells Fargo analyst Mike Mayo wrote in a note Friday that “there is no evidence of a banking crisis except that it seems that JPM has been a port in the storm.” UBS titled its note about the bank results this way: “What crisis? The banking industry flexes back.”

Lending rose among all banks in the week ending April 5, according to new Fed data released Friday. And so did deposits, by $61.5 billion.

Challenges ahead

Even if this is no longer a crisis, it was still clear from the results that the industry faces a number of challenges that will continue to test even the biggest and most resilient banks while pressuring some of their smaller, weaker rivals.

Chief among them is the effect that higher interest rates have on deposits and loans, or more specifically a key measure of profitability known as net interest income. It is the difference between what a bank earns on its loans and pays out on its deposits.

The rise in interest rates over the past year boosted this measure of income for some of these large banks, including JPMorgan and Wells Fargo, because it allowed them to charge more for their loans. JPMorgan's net interest income was up 48% compared to the year-ago quarter, and it raised its net interest income expectation for all of 2023 to $81 billion.

But the concern now is that those margins could begin to fall across the industry as institutions that don’t have the heft of JPMorgan begin to pay more aggressively for deposits, hoping that higher rates will keep their funding intact.

At PNC and Wells Fargo, net interest income actually fell when compared to the fourth quarter of 2022; PNC said it expects this income to be down 2-4% in the second quarter. Dimon admitted in a call with reporters that JPMorgan’s net interest income "will come down significantly next year and I think that's a more important statement than what it is for this year."

Wells Fargo and PNC stock ended Friday roughly flat, compared with a 7.5% rise at JPMorgan and a 4.8% rise at Citigroup.

Thinning margins

Those pressures are even more acute for small banks that depend on loans for much of their profits and can’t turn to investment banking or trading for additional revenue.

When one small Southern institution, Bank of South Carolina (BKSC), announced its earnings last Tuesday its president warned in a release that the bank was behind in its profit plan for the first three months of the year because of “precipitous increases in our deposit costs to meet the intense competition.” Loan interest income was up but “our margins remain thin.”

Stocks of some regional lenders dropped Friday, especially those that received more investor scrutiny following the failures last month of Silicon Valley Bank and Signature Bank. Truist (TFC), one of the biggest regionals in the US, was down 1.7%. Smaller regionals PacWest (PACW) and Western Alliance (WAL) were down 1.7% and 1.5% while First Republic (FRC) and Zions (ZION) lost more than 3%.

The results from the biggest banks offered other warnings about possible trouble to come. JPMorgan and Wells Fargo, for example, are both preparing for the possibility that credit conditions could worsen.

JPMorgan increased its provision for credit losses by 56% compared to a year ago, a sign that it expects more debt to go bad as the economy slows. Wells Fargo put aside $1.2 billion for credit losses, including a $643 million increase in the allowance for credit losses on commercial real estate loans, as well as an increase for credit card and auto loans. Some analysts expect commercial real estate to be a problem for some banks as developers struggle to pay their debts.

“While most consumers remain resilient, we’ve seen some consumer financial health trends gradually weakening from a year ago, and we’ve continued to take credit tightening actions to position the portfolio for a slowing economy,” Wells Fargo CFO Michael Santomassimo said on an earnings call.

Fraser, Citigroup’s CEO, said the bank expected recent industry turmoil to cause “credit to contract,” meaning it’s “more likely that the US will enter into a shallow recession” late in the year.

Such a recession “could be exacerbated in depth and duration in a more severe credit crunch."

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