Wall Street Revival Boosts Big Banks While Main Street Struggles

The Wall Street recovery gave big banks a boost in the second quarter, at a time when their operations with consumers are increasingly difficult.

Investment banking fees rose at JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) from a year ago as foreign exchange trading showed signs of recovery after two years of declines. Trading revenue also rose at all three institutions.

“We’re pleased to see the progress,” JPMorgan Chief Financial Officer Jeremy Barnum told analysts.

Shares of all three banks fell, however, as higher interest rates and higher deposit costs squeezed margins at traditional retail banks. The banks also set aside more money for future loan losses compared with last year, a sign they expect credit conditions to deteriorate.

What caught investors’ attention Friday was weakness in a key measure of loan revenue, net interest income. It fell sequentially at JPMorgan, Wells Fargo and Citigroup as their clients continued to migrate to higher-yielding deposit products like CDs.

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

At JPMorgan, that figure was down 1% from the previous quarter. Excluding an $8 billion one-time accounting gain from a stock swap in credit card giant Visa (V), JPMorgan’s overall net income would have fallen 9% from a year earlier.

Its action was roughly stable at midday.

Wells Fargo’s net interest income decline was deeper than analysts expected, helping send its stock down more than 7%.

Several analysts had hoped that Wells Fargo might raise its full-year net interest income forecast. Instead, the bank appears to be settling for a lower range, predicting that net interest income would fall between 8% and 9%.

But Wells Fargo also benefited from the increased activity on Wall Street. Its investment banking revenue jumped 38% to $430 million.

At JPMorgan, investment banking expenses rose 50% from a year ago, to $2.35 billion. At Citigroup, those expenses jumped 60% in the second quarter, to $853 million.

‘Green signals’

Wall Street has been waiting for this moment for two years, after experiencing many false starts.

2020 should have been a turnaround year, with corporate executives announcing a flurry of IPOs and mergers. Instead, 2023 has been the worst year for deals in a decade, as clients have grown cautious about everything from the direction of interest rates to relations with China to the broader U.S. economy.

Some executives have even had to backtrack on their statements about “early warning signs” after the hoped-for increase in the number of transactions failed to materialise.

The story continues

So far this year, the situation looks positive despite lingering concerns about inflation, geopolitical tensions and the uncertain outcome of the presidential election.

JPMorgan and Citigroup’s second-quarter results on Wall Street were also a good sign for other Wall Street heavyweights such as Goldman Sachs (GS), Morgan Stanley (MS)…