Slowing demand and sinking markets have put an end to a period of record-setting profits for the country’s biggest banks, but that doesn’t mean a recession is imminent, top bankers say, even if it may look like they are preparing for one.
On Thursday, JPMorgan Chase and Morgan Stanley both reported smaller profits for the second quarter than for 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 adopting 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, like travel and restaurants, and the businesses that JPMorgan lends to are making more use of some credit lines. Those are two signs that economic activity has — so far — held up despite a surge in annual inflation, which hit 9.1 percent in June.
“We’ve looked a lot very carefully into our actual data,” Jeremy Barnum, the bank’s chief financial officer, said on a call with reporters. “There is essentially no evidence of actual weakness.”
JPMorgan’s earnings were weighed down by sinking stock prices, slower investment banking activity and a softer market for home loans. It is feeling the effects of interest rate increases the Federal Reserve is making to combat steep inflation, which has roiled financial markets. Jamie Dimon, JPMorgan’s chief executive, said bankers were preparing for a potentially rocky year ahead.
“We are dealing with two conflicting factors, operating on different timetables,” Mr. Dimon said in a news release. “The uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices, are very likely to have negative consequences on the global economy sometime down the road.”
JPMorgan earned $8.6 billion from April to June, 28 percent below a year earlier but slightly higher than its first-quarter profit of $8.3 billion. It set aside new reserves in large part for potential losses on its loans in its consumer business, reporting a provision for losses totaling $1.1 billion. The bank’s latest earnings missed analyst expectations, hitting its stock, which fell 3.5 percent by the close of trading on Thursday.
But the bank is still issuing new credit cards, and card use was 15 percent higher than last year. Spending on travel and dining was 34 percent higher.
For Wall Street, the fees the bank earned providing investment banking services, like advising companies on mergers and underwriting initial public offerings, fell sharply. They were 54 percent lower than they were a year earlier, contributing to a 26 percent drop in profit for its Wall Street business overall. But the quick and substantial swings in the prices of stocks, bonds and other financial products caused the bank’s revenue to rise 15 percent from last year in its trading businesses, which thrive during times of volatility.
JPMorgan also announced that it was suspending buybacks of its stock — a way of distributing extra cash to shareholders — to build reserves of capital more quickly to meet reconfigured requirements set by regulators. Mr. Dimon told reporters that without the new regulatory requirements, the bank would “probably” still be buying back stock.
Profit at Morgan Stanley also missed analyst expectations. The investment bank and investment firm’s earnings fell nearly 30 percent in the second quarter from a year earlier, to $2.4 billion. The recent market turmoil halted deals and caused fees from stock and bond offerings to plunge.
Nonetheless, the bank, unlike JPMorgan, announced a new stock buyback, saying it planned to repurchase as much as $20 billion of the company’s shares, though the bank didn’t give a time frame for the purchases. Past buybacks have raised issues with regulators, who worry in times of turmoil that using cash to buy shares depletes the capital that banks have to cover loan losses.
On a conference call with analysts, James Gorman, Morgan Stanley’s chief executive, got pushback from some analysts on the buyback plan. Mike Mayo, who covers banks for Wells Fargo, asked whether it was time for the bank to shift to “Plan B,” given the worsening economic outlook.
“It’s a challenging market, but I think it is important to say that it’s not 2008 complicated.” Mr. Gorman said.
He suggested that the bank would be more conservative in its plans for expansion. “We are in a bit of an uncertain world,” he said. “I don’t think this is the time to be overly aggressive.”