Big Banks Send Mixed Signals on Economic Outlook
Two more big banks provided updates on the fragile state of the economy on Friday, with one showing signs of trouble and the other managing to capitalize on conditions that are hurting its peers.
Wells Fargo reported its second-quarter earnings, revealing an increase in credit loss reserves, write-downs on investments and slowing home loan activity. Citigroup’s second-quarter report showed some of the same pressures, but it generated a much larger profit than analysts had expected, unlike Wells Fargo as well as JPMorgan Chase and Morgan Stanley, which released their latest financial results on Thursday.
“Nothing in the data that I see signals that the U.S. is on the cusp of recession,” Jane Fraser, Citi chief executive, told analysts on a conference call after the earnings. “While a recession could indeed take place, it is highly unlikely to be as severe as others we have seen.” The bank’s stock jumped more than 9 percent in early trading, outpacing gains at other banks, and was up more than 13 percent at the close.
Citi’s latest quarterly profit was down 27 percent from a year earlier, to $4.5 billion, but far better than the market had expected. Citi’s customers spent 18 percent more in the quarter on their credit cards than they did a year earlier. And despite the increase in spending, the share of Citi’s credit card loans that were more than three months past due fell slightly from a year earlier.
Revenue from its bond and commodities trading business jumped 31 percent. The company said its transaction and payment processing division, one of the largest in the world, had its best quarter in a decade.
Still, there were signs of potential trouble ahead. The bank set aside $1.3 billion to cover bad loans, and like JPMorgan, Citi said it would pause stock buybacks. Citi’s fees from advising on mergers as well as underwriting stock and bond offerings fell nearly 50 percent from a year earlier.
“We are worried about inflation; we are worried about recession; we are worried about rate increases,” Mark Mason, Citi’s chief financial officer, said on a call with reporters. The bank is also in the process of selling its business in Russia, which Mr. Mason estimated would cost $2 billion.
“We are clear on our strategy to exit Russia, and we are exploring all angles for doing that,” he said.
Wells Fargo announced on Friday that it had earned less in the second quarter than what analysts expected and that the shortfall was due in part to a hit of nearly $600 million in its portfolios of venture capital and private equity investments. Mike Santomassimo, the company’s chief financial officer, said on a call with reporters that the losses were on investments the company had held for years that had to be assigned lower valuations when the stock market fell.
Wells Fargo earned $3.1 billion for the quarter, 48 percent less than a year earlier and 15 percent less than in the previous quarter this year.
The bank also described a slowing home loan business and lower investment banking fees. It added $580 million to its provision for credit losses, but said its individual and corporate customers had not yet begun to fall behind on loan payments. Mr. Santomassimo said executives were preparing for a range of scenarios but were aware that “things will probably get worse.”