After ten rounds of monetary tightening, how has the high inflation pattern in the United States affected the earnings of large banks?
preface
After more than a year of 10 rounds of monetary tightening, although the current federal funds rate in the United States has reached a high level of 5%-5.25%, the inflation rate in the United States remains at about 4%, far from reaching the expected target.
Some large banks in the United States are operating very "steadily", not only the year-on-year growth rate of operating income has reached double digits, but also the operating profit is also positive growth.
So how did the big banks in the United States achieve economic inverse growth in the midst of frequent monetary tightening?
After the "subprime mortgage crisis" in 2008, in order to cope with the economic contraction and save the collapsing financial system, the United States began a long-term unlimited "quantitative easing" monetary policy.
Not only did interest rates fall to near-zero, but the addition of "money printers" and round-the-clock pumping money into the economy finally led to inflation (CPI) in the United States breaking through the ideal value of 2% in March 2021 to 2.6%.
U.S. inflation has soared, reaching 7% in December 2021 and hitting new highs of 7.5%, 8.5% and 8.6% in January, March and May 2022.
By June 2022, it broke another nearly 41-year inflation record of 9.1%. Although it began to decline after July 2022, it remained at a high level of 4% through May 2023.
In order to cope with inflation, the Fed "repeats the old drama" and enters a new round of interest rate hike cycle from March 2022, following the rate hikes of 25, 50, 75, 75, 75, 75, 75 and 50 basis points in March, May, June, July, September, November and December 2022, respectively, and 25 basis points in January, March and May 2023.
After 10 consecutive rate hikes, the target range of the US federal funds rate was raised to between 5% and 5.25% on May 3, 2023, and the cumulative rate hike has reached 500 basis points.
Rate hikes were suspended in June 2023, but Fed Chairman Jerome Powell said it was just a continuation of the Fed's slowing pace of rate hikes.
The slowdown in the pace of rate hikes only indicates that the Fed is trying to get more information from the economic data and observe the effectiveness of tightening, with the Fed's primary goal still being to reduce inflation to 2%.
If high inflation will stimulate economic development to a certain extent, then the high interest rate policy largely determines the bank's operating performance and the bank's business orientation, thus determining the bank's profit model.
Different from the same period in 2022, since entering 2023, although there have been some bank failures, and this "failure" trend may continue to occur, the operating performance of large US banks has basically achieved stable growth.
JPMorgan Chase, Bank of America, Citibank, and Wells Fargo all increased significantly in operating income and operating profit compared with the same period last year, with operating income growth reaching double digits and operating profit growth almost all reaching double digits.
Specifically, JPMorgan Chase achieved a net profit of $12.6 billion, up 52% from the same period last year, and operating income of $38.349 billion, an increase of 25%.
Bank of America posted a net profit of $8.2 billion, up 15%, and operating income of $26.3 billion, up 13%.
Citibank's net income was $4.6 billion, up 7%, and operating income was $21.4 billion, up 12%.
Wells Fargo's net profit was $4.88 billion, up 24.55%, and operating income was $20.7 billion, up 17%.
If the trend of income and profit of these four major banks reflects their operating capacity, then the respective proportions of interest income and non-interest income and their rate of change reflect their profit model.
On the one hand, the four largest banks accounted for about 57% and 43% of total income in the first quarter of 2023.
On the other hand, interest income growth rates of 49%, 25%, 23% and 45% respectively exceeded the growth rates of non-interest income by 5%, 1%, -3% and -13%.
Wells Fargo, in particular, saw a 45 percent increase in interest income while non-interest income fell 13 percent. This reflects the problem that the major banks used to have very high non-interest income, which is the main source of income and profit for banks.
However, with the adjustment of US monetary policy, the increase in bank interest rates and the widening of interest rate spreads, the current source of income and profit of major banks has changed to mainly rely on credit interest income.
On a case-by-bank basis, JPMorgan's net interest income still reached $20.8 billion, up 49% year-over-year, apparently driven by higher interest rates, despite a decrease in its deposit balance.
Noninterest income of $18.5 billion increased just 5 percent over the same period, driven by higher net losses on corporate investment securities, investment banking fees and lower operating leasing income from its automotive business.
Bank of America net interest income of $14.4 billion increased 25%, also driven by higher interest rates and higher lending.
Noninterest income of $11.8 billion increased just 1%, primarily due to lower service expenses and asset management and investment banking fees.
summary
The expansion of the scale of deposits and loans, especially the expansion of the scale of loans, will rapidly increase the operating income and profits of the corresponding departments and institutions.
Revenues and profits of other divisions and businesses either grew slowly or did not increase but decreased. This further indicates the rapid shift of banks' profit models to interest income in the context of high inflation and high interest rates.
