Summary
In the first quarter, JPMorgan Chase & Co.'s net interest income was $23.2 billion, up 12% year-on-year and down 4% quarter-on-quarter. This brings J.P. Morgan's net interest income to a record high for seven consecutive quarters to an end
Text: Kang Kai
Editor|Zhang Wei
The profit growth did not mask concerns about pressure on JPMorgan's net interest margin.
According to the financial report data released on April 12, Eastern time, in the first quarter, JPMorgan Chase's net profit was $13.419 billion, an increase of 44% quarter-on-quarter and 6% year-on-year, respectively. The company's net interest income (NII) was $23.2 billion, up 12% year-over-year and contracted sequentially for the first time since 2021.
JPMorgan shares closed down 6.5% on April 12 after the release of the first-quarter earnings report, the biggest one-day drop since June 2020.
For the full year, JPMorgan expects net interest income to be around $90 billion in 2024.
The pressure on net interest margins is not unique to JPMorgan. According to the financial report data released on the same day on the 12th Eastern time, in the first quarter, Wells Fargo's net interest margin income was $12.2 billion, down 8.3% year-on-year, slightly lower than analysts' expectations of $12.3 billion.
Affected by this, the KBW Nasdaq Bank Index fell 1.5% in intraday trading on April 12, and has fallen 6.5% this month. This reflects a realignment of investors' expectations that the banking sector is likely to perform better when interest rates fall. On the same day, shares of Citibank and Wells Fargo also fell.
Xinkota, a senior analyst at Jiasheng Group, said that although JPMorgan Chase's operating income and net profit in the first quarter exceeded expectations, the performance guidance for net interest income was lower than expected, causing its stock price to fall.
However, in the longer term, JPMorgan Chase has been very profitable in the high-interest rate environment. As of April 11, JPMorgan Chase & Co. shares are up 14.9% this year.
（摩根大通股价走势，数据来源：Market Watch）
1. Net interest income ended the quarter at a record high
According to the financial report, in the first quarter, JPMorgan Chase's net interest income (NII) was $23.2 billion, up 12% year-on-year and 4% quarter-on-quarter, the first time since 2021. This brings J.P. Morgan's net interest income to a record high for seven consecutive quarters to an end.
Looking at the full year, JPMorgan expects to receive about $90 billion in net interest income in 2024. This is basically the same as the previous statement.
Net interest income is a key measure of a bank's profitability and reflects the difference between the income earned on the bank's assets and the cost the bank pays for absorbing funds, including deposits.
Net interest income came under pressure, partly because the gap between what banks earn on loans and what they pay on deposits narrows as the Fed's interest rate hikes come to an end. Banks say higher interest rates are forcing them to pay higher deposit rates, but that pressure on their core loan income will fall in 2024 and is unlikely to ease anytime soon.
On the deposit side, in the first quarter, JPMorgan Chase paid a deposit rate of 2.85%, up from 1.85% in the same period last year. On the lending side, while stronger loan growth can offset higher deposit costs, higher interest rates can also hinder loan demand. In the first quarter, JPMorgan Chase's average loan balance decreased sequentially.
This is not unique to JPMorgan. In the first quarter, Wells Fargo paid an interest rate of 2.34 percent on deposits, almost double what it was a year ago. Citibank's figure was 3.7 percent. During the same period, Wells Fargo's average loan balance also decreased sequentially.
On the other hand, the balance of deposits in the consumer business decreased. Barnum, the chief financial officer of JPMorgan Chase & Co., said customers moved more money to accounts with higher savings rates, eroding the bank's lending profits. Against the backdrop of high U.S. interest rates, yields on interbank certificates of deposit, Treasury bills and money market products are higher.
This has led to concerns that JPMorgan's large gains from a high-interest rate environment may have leveled off over the past two years. According to the data, JPMorgan Chase, Wells Fargo, Citibank, and Bank of America will have net interest income of $253 billion in 2023, an increase of 19% from 2022 combined.
The interest rate environment is a key factor affecting net interest margins. At a time when JPMorgan's net interest margin is under pressure, expectations for the US interest rate environment have also changed.
Previously, the market widely expected that in 2024, the Fed will cut interest rates three times, the first of which may be in June. However, the latest data from the U.S. Department of Labor showed that inflation in the U.S. has not stabilized, suggesting that the Fed may not start the process of cutting interest rates prematurely.
As a result, the yield on the 2-year Treasury note, which is linked to interest rate expectations, has recently surged to nearly 5%. The latest data from the Chicago Mercantile Exchange FedWatch showed that the market is betting that the probability of a Fed rate cut at its June meeting will fall below 20%, with the first rate cut likely to be in September.
JPMorgan Chase CEO Dimon even warned that U.S. interest rates could reach 8% or higher under inflationary pressure.
2. Investment banking revenues were higher than analyst expectations
Net interest margins are under pressure, with small and medium-sized banks being more stressed than large banks. Because the latter's income sources are more diversified, there are also businesses such as investment banking and wealth management.
In response, the capital market has responded. In the previous 12 months in a high interest rate environment, the KBW Bank Index rose more than 20%, while the Regional Bank Index rose only 6%.
In the case of JPMorgan Chase, its investment banking revenue of $2 billion in the first quarter was higher than analysts' expectations.
Some analysts believe that although it will take time for the IPO business to recover, the boom in the debt market on Wall Street in the first quarter has boosted the revenue of the investment banking business of major banks. As of March 27, U.S. investment-grade corporate bond financing in the first quarter reached $529.5 billion, surpassing the record high of $479 billion set in the first quarter of 2020.
At the same time, investment banks in the Asia-Pacific region are also looking for new avenues. Many market participants believe that many Hong Kong-listed companies are currently trading at lower prices than in Europe and the United States, and investors may take this opportunity to make more mergers and acquisitions and privatization transactions, which may provide new business opportunities for investment banks.
Looking at other segments, JPMorgan Chase's retail banking revenue increased 7% in the first quarter. Both equity and fixed income trading businesses outperformed expectations.
JPMorgan Chase & Co. paid $725 million in special expenses to the Federal Deposit Insurance Corporation in connection with the 2023 bank failure, compared with $2.9 billion in the previous quarter.
In addition, JPMorgan Chase & Co. reported a provision for credit losses of $1.88 billion in the first quarter, well below analysts' expectations of $2.7 billion, down 32% sequentially and 17% year-on-year, respectively.
Dimon cautioned that while many economic indicators continue to be favorable, there are a number of major uncertainties that should be kept vigilant. First, geopolitical tensions are growing. Second, persistent inflationary pressures are likely to persist. Third, quantitative tightening, which has not been adequately experienced, is emerging.