JPMorgan Calls The Top Of Banking's Big Moneymaker

When American depositors were anxious in March, they shifted money from smaller banks to larger ones — and, based on first-quarter statistics released by numerous institutions on Friday, that mostly meant JPMorgan Chase & Co.

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During a turbulent month in banking, when three small American banks and one massive Swiss bank failed, deposits at the largest US bank increased while total deposits in the system decreased. As compared to Citigroup Inc. and Wells Fargo & Co., JPMorgan's experience demonstrates that when it comes to safety, scale matters more than anything else.

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JPMorgan reported a 1.6% deposit increase in the first three months of 2023 compared to the same period last year, while Citigroup's deposits declined 2.6% and Wells Fargo's deposits fell 1.5%. Deposits at all US banks fell 3.3%. When Bank of America announces its numbers next week, it may still see inflows similar to JPMorgan.

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JPMorgan, on the other hand, had a greater and more important surprise in its results than deposit flows: a massive increase in its prediction for net interest income - the difference between what it pays on deposits and earns on loans and other assets.

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The bank outperformed rivals in net interest income in the first quarter and above analysts' forecasts with a prediction of $81 billion in net interest income for the whole year; the market average was $74 billion. But, it also indicated that net interest income would swiftly fall back to the mid-70s in the medium future.

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The bank did not specify when the medium term will arrive, but Dimon told journalists that interest income next year would most certainly be significantly lower than this years. Several of the bank's actions during the quarter also hint that the peak is now.

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On the deposit side, Dimon and his colleagues emphasized that the increased interest-income expectation was not driven by first-quarter inflows. The bank expects this money to come and go as it pleases.

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Instead, it anticipates a resumption of a decreasing trend in deposit holdings. Despite growth in the first quarter, its deposits are down more than 7% year on year, outpacing the systemwide decrease of 5%. It makes sense given that JPMorgan's coffers are swollen the greatest as a result of the torrent of pandemic-era government spending and have yet to return to normal.

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The ongoing loss of deposits is due to a combination of the Fed's diminishing balance sheet and the growing appeal of money market funds as a way to stow excess cash. As a result, banks will face more competition for deposits and greater expenses, reducing net interest revenue.

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On the asset side of the balance sheet, JPMorgan has been trading its securities more aggressively, implying that it is placing a larger wager that some bond rates have also peaked. It lost $868 million on investment securities sold during the quarter, mostly mortgage bonds and Treasury securities.

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The primary rationale for doing so is to increase current income by selling lower-yielding bonds and replacing them with higher-paying ones. The magnitude of the loss, which was more than double what JPMorgan reported at the same time last year, shows that the bank sold over a larger portion of its portfolio.

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The bank anticipates that profits from credit card lending will increase as consumers continue to spend and borrow more. Spending is still high, and household balance sheets are in good shape, but the clouds of the recession that Dimon has been monitoring for at least a year linger on the horizon and will arrive in some form at some point. Citigroup and Wells Fargo made similar comments about the economy, and while all three banks reported an increase in provisions for loan losses, none predict anything more than a return to more normalized loss rates.

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Lending criteria will tighten — but don't call it a credit crunch, Dimon cautioned one analyst — and interest rates will begin to fall again, but the big banks are confident that the worst of the banking instability experienced this year has gone. There is, however, considerable uncertainty about how smoothly the system will continue to respond to increased interest rates and the ongoing loss of money and liquidity.

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JPMorgan has been a big winner so far, but the year ahead could still be incredibly bumpy for everyone.  

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