US banks: bigger is still better for now

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America’s biggest banks are doing just fine. Businesses and consumers are still spending and borrowing, even as interest rates remain at a 22-year high.

JPMorgan Chase, Citigroup and Wells Fargo were all able to charge more on loans while increasing payouts on deposits more slowly. The three lenders collectively earned $49.6bn in net interest income during the third quarter. That is a 29 per cent increase from the year ago period. 

At JPMorgan, growth in its loan books was more than enough to offset the weakness in trading and investment banking. Net income rose by more than a third. Those at Wells jumped 60 per cent. Citi reported a more modest year-on-year 2 per cent gain.

Their resilience could bode ill for America’s smaller regional banks. The latter have been losing customers and deposits to their bigger rivals. The KBW regional bank index fell nearly 1 per cent on Friday. Shares in JPMorgan, Wells and Citi rose between 2.4-3.4 per cent.

But even among the big banks, signs abound that the surge in net interest income is not sustainable. Consumers are getting more cautious. Funding costs are going up. That will put a lid on net interest margin growth. At JPMorgan, interest expense was 170 per cent higher compared with a year ago. Even so, overall deposits fell 1 per cent year on year. Both Wells and Citi reported a 3 per cent year-on-year drop in deposits.

Between the three, Citi looks to have less wriggle room when it comes to funding costs. Only 15 per cent of its US deposits are in non-interest-bearing accounts. These deposits — the cheapest source of funding for banks — fell 5 per cent between the second and third quarter.

At JPMorgan, they fell 1 per cent quarter on quarter and still accounted about a third of its total US deposits. JPMorgan’s strong balance sheet and diversified business model helps explain why the stock continues to trade at a hefty premium to its peers on a price to book value basis.