Wall Street Banks’ Credit-Card Success Eases Worry Over Consumer

(Bloomberg) -- U.S. consumers haven’t let soaring gas prices, interest-rate hikes or the latest Covid variant slow them down. 

The country’s largest banks said spending on their credit cards surged in the first quarter as customers began traveling and dining out again after years of pandemic lockdowns. Even with the increased spending, borrowers kept up with their bills and lenders’ charge-off rates for bad debt held near historic lows. 

For months, bank executives have questioned how consumers would fare as government stimulus checks dried up and other Covid-19 relief programs ended. On Monday, Bank of America Corp. offered perhaps the clearest answer yet: Average credit-card balances have dropped 8% since the first quarter of 2020, while the lender’s average deposit balance soared 39%, even for those customers with a subprime credit score. 

“We have seen a strong recovery in travel, entertainment and restaurant spending,” Chief Executive Officer Brian Moynihan told analysts on a conference call Monday. “Importantly, despite March of last year including the stimulus, we saw spending in the month of March 2022 on a comparable basis to 2021.” 

Russia Fears

Still, executives were quick to point out the bevy of risks to the global economy. Citigroup Inc., for instance, set aside $1.9 billion in reserves for souring loans that might be affected by economic fallout from Russia’s invasion of Ukraine. The move weighed on profit, which slumped 46% in the first quarter.

Goldman Sachs Group Inc. executives said the firm logged a $300 million loss after closing out positions and reducing exposure to Russia. JPMorgan Chase & Co. reported a $524 million loss in its trading division linked to market fallout from the invasion, about $120 million of which was tied to “extreme price movements” in nickel.

“The Russian invasion of Ukraine and the sanctions it triggered unleashed an enormous supply shock on the world, further fueling inflation and placing global growth under considerable pressure,” Citigroup CEO Jane Fraser said last week. 

Trading Triumphs

While the war weighed on lenders’ outlooks, it was a boon for their trading desks. Goldman Sachs and Morgan Stanley pulled off surprise increases in trading revenue from a year earlier, while JPMorgan, Citigroup and Bank of America declined less than analysts predicted.

The results help pad earnings and, for now, helped alleviate concern that trading revenue would decline sharply from pandemic-era highs. Taken together, the trading hauls from Wall Street’s five biggest firms dipped just 1% from a year earlier, vastly better than the 19% decline analysts were expecting. 

“I cannot foresee any scenario at all where you’re not going to have a lot of volatility in markets going forward,” JPMorgan CEO Jamie Dimon said on a call with analysts Wednesday. “That could be good or bad for trading, but there’s almost no chance that it won’t happen, and I think people should be prepared for that.”

Dealmaking Spree

Investment-banking revenue slowed in the quarter, with market turmoil cooling the appetite for new debt and equity. Goldman Sachs CEO David Solomon called equity underwriting volume “lackluster,” adding that many sales that were supposed to happen in the first quarter got pushed out due to volatility. A slowdown in listings by special purpose acquisition companies, a key source of business last year, hampered results in the first three months of 2022.

Still, fees from advising on mergers and acquisitions were a bright spot. Revenue in that business gained from a year earlier at all five of the biggest investment banks, bolstered by deals first announced last year. Goldman Sachs CFO Denis Coleman said conversations with clients about potential transactions remain “significantly elevated.”

Net Interest Income

The Federal Reserve in March boosted interest rates from near zero. The largest U.S. banks are starting to realize benefits from that increase, with executives at Morgan Stanley, JPMorgan and Bank of America all pointing to the trend as a driver of first-quarter net interest income, the revenue collected from loan payments minus what depositors are paid. 

That’s expected to accelerate as the Fed continues boosting its benchmark rate. While rate hikes help profits, they have diminishing benefits the higher they go. 

“A rate environment where we come off the zero floor makes us a lot more money,” CEO Moynihan said. “You know that and we know that.”

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