On Thursday, American investors received strong hints of growing malaise among Americans as PepsiCo, Delta Airlines, and food group Conagra all reported clear signs of weak consumer support for price rises and weakening sales volumes (or slowing ticket sales in the case of Delta).
Earnings from the three companies were satisfactory for the June quarter, but the comments from senior managers were guarded, indicating clear concerns about the remainder of the year and the trend for consumers to reduce purchases and/or switch to cheaper products.
Friday saw three of America's largest banks reveal similar concerns, led by the largest, JPMorgan Chase, along with Citi and Wells Fargo. The trio disclosed weakening results for the June quarter, with growing concerns evident about rising consumer debts, loan arrears, and other issues (many stemming from banks' increased lending to financially stressed customers).
The reports prompted investors to mark down the shares of all three banks: JPMorgan by 1.2%, Citi by 1.8%, and Wells Fargo by more than 6%.
The three banks warned of stress among the lower-income consumer segment and indicated expectations of deteriorating credit conditions by setting aside more funds for future loan losses.
JPMorgan Chase and Wells Fargo saw their adjusted profits fall, while Citigroup reported a rise but noted sluggish spending on its credit cards.
The major banks have benefited from higher interest rates over the last two years, which boosted interest income. However, these rates are now causing consumers and businesses to cut or defer spending due to higher financing costs and weakening demand for their products and services.
JPMorgan stated in its quarterly report that it had set aside $US3.1 billion to cover potentially bad loans, a sharp increase from a year earlier, as the bank acknowledged rising loan payment delinquencies among more Americans. Citigroup also increased its reserves for potential losses and reported a 52% jump in net credit losses over the past 12 months to more than $US2.2 billion.
"Higher-for-longer interest rates, persistently high housing prices, softening used vehicle values, and signs of a cooling labor market merit focused scrutiny from the banking sector," wrote Chris Stanley, Moody's banking industry lead, in a note to investors.
JPMorgan's headline profits surged sharply in the second quarter as the bank realized billions of dollars from its holdings in Visa Inc., making its financial results appear stronger than they actually were. The nation’s largest bank by assets reported a profit of $US18.15 billion, up 25% from estimates a year earlier.
A significant contributor to JPMorgan’s results was a $US7.9 billion gain on its stake in Visa (similar for Citi as well), as the bank converted its ownership in the payment processing giant into common stock in the second quarter. Additionally, the bank donated $1 billion of Visa shares to JPMorgan’s philanthropic organization (and received a tax write-off).
Wells Fargo earned $US4.91 billion in the second quarter on revenue of $US20.7 billion, slightly surpassing last year’s $US20.5 billion. Wells attributed growth in fee-based revenue to offsetting a decline in net interest income, which fell 9% to $US11.9 billion — a figure below expectations that led to a nearly 7% drop in the bank's shares.
Citigroup reported a 10% increase in quarterly profit on Friday, buoyed by strength in its investment banking operations and its own sale of Visa shares. However, bank executives expressed concerns over slowing consumer spending, particularly among those with lower credit ratings and incomes. Citi shares fell almost 3%, though they are still up more than 20% for the year so far.
The three other mega banks in America — Goldman Sachs, Morgan Stanley, and Bank of America — are scheduled to report today and tomorrow.
