The nation's biggest banks are beginning to feel the sting of high interest rates as depositors increasingly move their funds to higher-yielding accounts, leading to a decline in a key revenue source for these financial giants. JPMorgan Chase, Wells Fargo, and Citigroup all reported a drop in net interest income (NII) during the first quarter of the year, signaling that even the largest institutions are not immune to the challenges posed by elevated interest rates.
Net interest income, which measures the difference between what banks earn on their assets and pay out on their deposits, fell 4% sequentially at JPMorgan Chase and Wells Fargo, and 2% at Citigroup. For JPMorgan, this marked the first sequential drop in nearly three years, causing its stock to plummet by more than 6%, its largest single-day drop since 2020.
Despite turning in strong first-quarter earnings, the trio of banks warned that the profit growth they've been enjoying from higher rates is starting to fade. Wells Fargo reported that its NII fell 8% in the first quarter compared to a year earlier, citing "customer migration to higher yielding deposit products." JPMorgan Chase CEO Jamie Dimon acknowledged that the bank faces "deposit margin compression and lower deposit balances," while Citigroup's NII grew a mere 1% year-over-year, accompanied by a 2% decline in deposits.
JPMorgan CFO Jeremy Barnum explained that customers are moving their funds from checking and savings accounts to higher-yielding CDs, a trend he expects to continue. "Even if the current yield curve environment were to change and meaningful cuts were to get reintroduced ... we would still expect to see ongoing migration and yield-seeking behavior," Barnum said on a conference call.
While the banks grapple with the impact of high interest rates on their deposit bases, they experienced a surge in investment banking activity during the quarter, primarily driven by underwriting fees as companies tapped debt and equity markets. JPMorgan's investment banking fees rose 21% year-over-year to $2 billion, Citigroup's jumped 32% to $977 million, and Wells Fargo reported a staggering 92% increase to $627 million.
However, sustained higher interest rates could negatively impact the investment banking business in the coming quarters as well. The Wall Street Journal reported that "yields on corporate bonds are heading up again as investors have pared back expectations of rate cuts this year," suggesting that "fee income from debt issuance may head back down again."
The challenges faced by the nation's largest banks underscore the industry-wide struggle to boost net interest income as interest rates and deposit costs soar. While the big banks are better positioned than their smaller rivals to withstand a period of elevated interest rates, the pressure on deposit pricing is intensifying, with Wells Fargo and Citigroup disclosing higher costs for funding compared to a year ago.
Investors' expectations of a rate cut from the Federal Reserve in June have diminished due to hotter-than-expected inflation data and a surprisingly resilient economy, further compounding the challenges for banks. Wells Fargo Chief Financial Officer Mike Santomassimo acknowledged this shift in sentiment, stating, "Rates might be higher than what people expected a week ago. We do have to wait and see how clients are going to react."
Despite the headwinds, there were some positive aspects to the banks' results. JPMorgan's overall profits were up 6% from a year ago, beating Wall Street expectations, and the bank set aside less money for future loan losses. However, CEO Jamie Dimon reiterated his cautionary stance on the road ahead for the US economy, citing geopolitical tensions, persistent inflationary pressures, and the Federal Reserve's quantitative tightening campaign as significant uncertain forces.
