Senior officials at the two largest US banks, JP Morgan and Morgan Stanley, said customers continued to spend and companies continued to borrow even though investment banking revenues fell sharply. The biggest problem is insecurity.
The US’s largest bank, JP Morgan, said its profit in the second quarter of this year fell 28 percent year-on-year. Although JP Morgan announced a better-than-expected earnings decline, it said it saw little sign of an impending US recession.
The real problem, according to the investment bank, is the uncertainty both in the markets and in the economy as a whole.
According to Wall Street Journal news, the New York-based bank said that despite rising inflation, customers continue to spend, businesses continue to borrow and loan losses are almost non-existent.
‘UNCERTAINTY KEEPS BUSINESS ACTIVITIES LOW’
But bank executives said the uncertainty continued to be felt more than usual, dragging down key corporate activity such as mergers and acquisitions. Officials explained that due to the situation in question, the bank allocated more funds for possible future loan losses.
The report produced by the bank contained significant tensions in the markets and in the US economy this year. Unemployment remains at low levels and many consumers are maintaining spending levels.
However, pricing in many markets remained tense despite mass sales, it said. It was stressed that the expectation that the US Federal Reserve (Fed) will hike rates is encouraging investors to divest from equities and other risky assets.
JP Morgan shares fell 3.5 percent on Thursday and the Dow Jones industrial index fell 0.5 percent. Morgan Stanley shares fell 0.4 percent yesterday.
“The news is actually pretty good”
JP Morgan’s performance is considered a barometer for the entire US economy. The bank’s second-quarter results, released on Thursday, didn’t provide much clarity on whether the economy is headed for a recession in that regard.
“The news right now is actually pretty good,” JP Morgan CEO Jamie Dimon said on Thursday. “If you make a list of potential issues for the future, it can be a soft landing or a hard landing,” he said.
Dimon had come to the fore with warnings that the combination of unprecedented factors could hurt the economy for months.
“CONSUMERS KEEP SPENDING”
The Fed is preparing to aggressively raise rates to combat inflation, which has hit a 40-year high. Investors, on the other hand, are increasingly worried that the Fed will have to push the economy into recession to curb rising prices.
Though worried, consumers are continuing to spend thanks to strong recruitment, wage increases and the lingering impact of stimulus packages introduced during the pandemic era.
“The truth is that we have looked very closely at the actual data and results and there is essentially no evidence of weakness in the actual results,” said Jeremy Barnum, JFO of JP Morgan.
Barnum said the problem is the economic outlook.
“SITUATION IS NOT AS COMPLEX AS 2008”
Also on Thursday, executives at Morgan Stanley, the second-biggest bank in the US, emphasized the uncertainty in the bank’s second-quarter results.
Morgan Stanley CEO James Gorman said he could use the word “complicated” to describe the current situation, referring to the impact of inflation and geopolitical turmoil. However, Gorman added that the situation is still not as complex as it was in 2008.
JP Morgan’s earnings fell to $8.65 billion this year, compared to $11.95 billion last year. Morgan Stanley’s earnings also fell 29 percent to $2.5 billion.
JP Morgan’s revenue rose 1 percent in the second quarter of the year compared to the same period last year, while Morgan Stanley’s revenue fell 11 percent.
INCREASED CREDIT CARD SPENDING
In order to strengthen its capital, JP Morgan also announced that it has temporarily suspended its share buybacks. While last month’s annual stress tests showed the largest banks could survive a severe recession, their performance meant they had to hold more reserves.
On the other hand, JP Morgan’s Chase credit card spending increased 21 percent year over year and 15 percent compared to the first quarter. This growth includes travel and subsistence expenses. Executives said this looks like evidence inflation is not having a big impact.
While Chase customers already have more credit card debt, officials said most customers have higher cash balances than they did before the pandemic.
It was found that wealthy customers continued to borrow and invest even when the stock market fell. However, there is a more than 40 percent decline in expensive consumer loans such as home and auto loans.
“The main source of concern” is people on low incomes”
JP Morgan CFO Barnum said the only potential concern is low-income customers who are starting to spend their buffers of cash a little faster. Barnum also expressed that there is evidence that consumers with low credit ratings are slowly falling behind on debt.
However, major customers are more cautious about the future. Investment banking fees fell 54 percent at JP Morgan and 55 percent at Morgan Stanley. This situation shows that there is a slowdown in corporate transactions and stock sales.
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