Credit…Hiroko Masuike/The New York Times
Slowing demand and collapsing markets have ended a period of record profits for the nation’s biggest banks, but that doesn’t mean a recession is imminent, top bankers say, even if it appears to be they are preparing for one.
On Thursday, JPMorgan Chase and Morgan Stanley reported smaller profits for the second quarter than the same period last year.
JPMorgan set aside more money to cover potential loan losses and said it was suspending share buybacks. Morgan Stanley said it was taking a more cautious stance in response to the uncertain economic outlook.
But executives at JPMorgan, the nation’s largest bank, said there were few, if any, signs that the U.S. economy was entering a recession. Retail banking customers are still spending money on things they want but don’t need, such as travel and restaurants, and the companies JPMorgan lends to are making more use of some lines of credit. These are two signs that economic activity has held up, so far, despite the increase in annual inflation, which reached 9.1 percent in June.
“We looked very, very carefully at our actual data,” Jeremy Barnum, the bank’s chief financial officer, said on a call with reporters. “Essentially there is no evidence of real weakness.”
JPMorgan’s earnings were hit by falling stock prices, slower investment banking activity and a softer home loan market. It is feeling the effects of the Federal Reserve’s interest rate hikes to combat high inflation, which has hit financial markets. Jamie Dimon, chief executive of JPMorgan, said bankers were bracing for a potentially difficult year.
“We are faced with two conflicting factors, operating on different schedules,” said Mr. Dimon in a press release. “Uncertainty about how far higher rates should go and unprecedented quantitative tightening and its effects on global liquidity, combined with the war in Ukraine and its damaging effect on global oil prices energy and food, are very likely to have negative consequences on the global economy at some point.”
JPMorgan earned $8.6 billion from April to June, down 28 percent from a year earlier but slightly higher than its first-quarter profit of $8.3 billion. It set aside new reserves largely for potential loan losses in its consumer business, and reported a provision for losses totaling $1.1 billion. The bank’s latest earnings missed analysts’ expectations, hitting its shares, which fell 3.5 percent at the close on Thursday.
But the bank is still issuing new credit cards and card usage was up 15 percent from last year. Spending on travel and dining was 34% higher.
For Wall Street, the fees the bank earned for providing investment banking services, such as advising companies on mergers and underwriting initial public offerings, fell sharply. They were 54 percent lower than a year earlier, contributing to a 26 percent drop in profits at its overall Wall Street business. But rapid and substantial changes in the prices of stocks, bonds and other financial products saw the bank’s revenue rise 15 percent from last year in its trading business, which thrives in times of volatility.
JPMorgan also announced it was suspending its share buybacks, a way to distribute additional cash to shareholders, to build capital reserves faster to meet reconfigured requirements set by regulators. Mr. Dimon told reporters that without the new regulatory requirements, the bank would “probably” still buy back shares.
Morgan Stanley’s earnings also missed analysts’ expectations. Earnings at the investment bank and investment firm fell nearly 30 percent in the second quarter from a year earlier to $2.4 billion. The recent market turmoil halted deals and caused commissions for stock and bond deals to fall.
However, the bank, unlike JPMorgan, announced a new share buyback, saying it planned to buy back up to $20 billion of the company’s stock, although the bank did not give a timeframe for the purchases Previous buybacks have raised issues with regulators, who worry in times of turmoil that using cash to buy stocks will deplete the capital banks have to cover loan losses.
In a conference call with analysts, James Gorman, CEO of Morgan Stanley, received pushback from some analysts on the buyback plan. Mike Mayo, who covers banks at Wells Fargo, asked if it was time for the bank to switch to “Plan B” given the worsening economic outlook.
“It’s a challenging market, but I think it’s important to say that 2008 is not complicated.” said Mr. Gorman.
He suggested the bank would be more conservative in its expansion plans. “We’re in a bit of an uncertain world,” he said. “I don’t think this is the time to be too aggressive.”
Isabella Simonetti contributed to this report.