JPMorgan Chase, Bank of America and Wells Fargo earnings show the good, the bad and the ugly of people’s finances. So how are they holding up?
Friday’s wave of big bank earnings provides important insight into Americans’ finances amid high prices, rising interest rates and recession worries. At first glance, most consumers seem to keep their heads above water.
A day after December inflation data showed that price increases came off the boil — but still high — fourth-quarter earnings showed some signs of a slowdown and consumer strain, but not a falling apart wallet.
Case in point: Bank of America BAC, +2.20% consumer deposit balances are showing “strong liquidity.” The bank’s consumer customers spent $4.2 trillion in total last year, a 10% increase year over year, he noted, according to a FactSet transcript.
But there are early signs of a weakening economy: Those balances are “down,” CEO Brian Moynihan said on an earnings call discussing the bank’s fourth-quarter earnings, “but they still have a lot of cushion.”
Earlier in the week, research from the Bank of America Institute said that after strong spending in 2022, consumers were easing into the new year after spending slightly less than in 2021 on holiday-related items in November and December.
At JPMorgan Chase & Co., JPM, +2.52% combined credit and debit card spending for consumers and small businesses rose 9% year over year, said Jeremy Barnum, the bank’s chief financial officer, according to a FactSet transcript on Friday’s earnings call.
“They are broadly on a solid footing, although sentiment on both reflects recessionary concerns that are not yet fully reflected in our data,” Barnum said.
“The U.S. economy currently remains strong with consumers and businesses still spending more money [are] healthy,” JPMorgan CEO Jamie Dimon said in a fourth-quarter earnings statement. What is not known, he added, is the final toll of high inflation, reduced purchasing power and the fallout from conflicts such as Russia’s occupation of Ukraine.
“Our customers have remained resilient with deposit balances, consumer spending and credit quality still stronger than pre-pandemic levels,” Wells Fargo WFC, +3.25% CEO Charlie Scharf said in a statement on his bank’s results.
Banks set aside money for loan losses
Also on Friday, a gauge of consumer sentiment jumped to a nine-month high as inflation eased and stocks showed renewed strength. The index rose from a revised 59.7 in December, the University of Michigan said. However, consumer sentiment is still weak. The index is well off a pandemic-era peak of 88.3 in April 2021 and a pre-pandemic high of 101.
Bank earnings lead to a parade of fourth-quarter earnings results for other industries in the coming weeks. But they also help set the stage for the economic picture ahead.
Indeed, the earnings show that banks are building up their cash reserves to deal with potential loan defaults in all areas of the business, including consumer loans and credit cards.
“You heard they’re raising loan loss provisions,” said Quincy Krosby, chief global strategist at LPL Financial. “However, I wouldn’t say there are major concerns at this point about delinquencies or late payments.”
Delinquencies and defaults are inherently part of a bank’s business, Krosby noted. But “at the moment, it’s not flashing red.”
When we set aside money for such credit losses, “the goal is to overestimate, not underestimate,” said Greg McBride, chief financial analyst at Bankrate.com. The money banks hold back for loan losses can always be used elsewhere once they think any economic storm has come and gone, McBride noted. “The position they don’t want to be in is that they haven’t booked enough.”
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Consumer debt is gradually increasing
Consumer debt loads are rising, but a broad shift in delinquency is not materializing just yet. Aggregate debt balances, including mortgages, rose 2.2%, or $351 billion, to $16.51 trillion from the third quarter, according to data from the Federal Reserve Bank of New York.
Credit card balances rose $38 billion to $930 billion in the third quarter, a 15% year-over-year increase — the sharpest increase in more than two decades.
However, the amount of credit card and auto loan debt that goes into early delinquency rose by roughly 0.5 percentage point in the third quarter, the same increase as in the second quarter, Fed researchers noted. New York.
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The amount of delinquent debt rose for almost all types of debt and credit, but that follows “two years of historically low delinquency transitions,” the researchers said.
“Everything we see is going to be a mild recession,” Moynihan said in an interview Friday afternoon on CNBC, noting that the bank was well positioned if that were to happen. There are a lot more delinquencies coming up, Moynihan said, but keep it in perspective, he said.
Delinquencies, he added, “are still nowhere near where they were in ’19, which is among the best consumer credit statistics our company has had in its history. So you’re still nowhere near normal. And that means, yes, they are getting worse. But gradually across a broad consumer base you’re not seeing the stress yet.”
Banks will be watching the labor market closely for signs of stress and strain, Krosby said. A lost job can be a key trigger for falling behind on bills, Krosby and others have noted.
Even as news of layoffs in the financial and technology sectors increases, the unemployment rate fell to 3.5% in December. This unemployment rate was reached several times in 2019 and is the lowest since 1969.
“The labor market is crucial and so far the labor market has remained stable. It’s resilient,” Krosby said.
The Dow Jones Industrial Average DJIA, +0.33% , the S&P 500 SPX, +0.40% and the Nasdaq Composite COMP, -1.10% closed higher on Friday, capping their best trading week for gains in two months.
After the worst year for stocks since 2008, the Dow is up more than 3% year-to-date, while the S&P 500 is up nearly 4% and the Nasdaq is up more than 5%.