A Wall Street revival is carrying big banks as Main Street struggles

A Wall Street revival provided a second quarter boost to big banks at a time of rising challenges for their Main Street consumer operations.

Investment banking fees jumped at JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) from a year ago as dealmaking showed more signs of life following a two-year slump. Trading revenue was also up for all three institutions.

"We are happy to see the progress," JPMorgan CFO Jeremy Barnum told analysts.

Stocks of all three banks fell, however, as higher interest rates and elevated deposit costs ate away at more traditional consumer banking margins. The banks also set aside more money for future loan losses when compared with a year ago, a sign that they expect credit conditions to worsen.

What attracted a lot of attention from investors Friday was more weakness in a key measure of lending revenue known as net interest income. It fell sequentially at JPMorgan, Wells Fargo, and Citigroup as their customers continued migrating to higher-yielding deposit products like CDs.

Read more: How CDs work and how to choose the right ones for you

Net interest income is a central driver of profit for any bank because it accounts for the difference between what banks earn from their loans and pay out on their deposits.

This measure at JPMorgan declined 1% from the prior quarter. If not for an $8 billion one-time accounting gain tied to an exchange of shares in credit card giant Visa (V), JPMorgan’s overall net profit would have declined 9% from a year ago.

Its stock fell more than 1% Friday.

The decline in net interest income at Wells Fargo was deeper than analysts anticipated, helping to push its stock down 6%.

Several analysts hoped Wells Fargo might offer a higher revision to its net interest income guidance for the full year. Instead, the bank seemed more comfortable in a lower range, predicting it would fall between 8% and 9%.

But even Wells Fargo benefited from more Wall Street activity. Its investment banking revenues surged 38% to $430 million.

At JPMorgan, investment banking rose 50% from last year to $2.35 billion. At Citigroup, those fees jumped 63% in the second quarter to $935 million.

'Green shoots'

Wall Street has been waiting two years for this moment, enduring repeated false starts.

Last year was supposed to be the year things turned around as executives touted a string of IPOs and merger announcements. Instead, 2023 was the worst year for dealmaking in a decade as clients turned cautious about everything from the direction of interest rates to relations with China to the larger US economy.

Some executives even had to walk back their talk of "green shoots" after the hoped-for surge in deals failed to materialize.

So far this year, things are looking up despite lingering concerns about the path of inflation, geopolitical tensions, and an uncertain presidential election outcome.

The Wall Street performances of JPMorgan and Citigroup were also a good sign for other investment banking heavyweights such as Goldman Sachs (GS), Morgan Stanley (MS), and Bank of America (BAC) that are due to report earnings next week.

Despite the improvement, Barnum of JPMorgan was careful Friday not to get too excited as he cited potential headwinds. One potential barrier to new deals is an antitrust focus in Washington, which some market observers say is depressing deal activity.

"The dialogue on M&A is robust, I would say, a little bit more elevated,” Barnum said. However, "there's a little bit of a chilling effect on M&A because of the regulatory environment, and that remains the case.”

JPMorgan CEO Jamie Dimon also offered some general caution in a press release, saying that "while market valuations and credit spreads seem to reflect a rather benign economic outlook, we continue to be vigilant about potential tail risks."

He referenced geopolitical tensions and persistent inflationary forces, adding that "inflation and interest rates may stay higher than the market expects."

Dimon did not attend JPMorgan’s second quarter earnings conference calls with reporters or analysts Friday.

The reason given by bank executives: a travel conflict.

The bank’s spokesman told reporters Dimon was flying back from Germany after helping to celebrate the bank’s 100th anniversary in that country.

The bank CFO, Barnum, told reporters, "It's a travel conflict, that's it. There's literally nothing more to it.”

Barnum said Dimon almost always attends the calls and “that should continue to be the expectation.”

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