US bank stocks have hit their highest levels since the collapse of Silicon Valley Bank (SVB) in early 2023, driven by solid earnings reports from major financial institutions like JPMorgan Chase and Wells Fargo.
The positive performance has bolstered investor confidence, even as banks prepare for potential economic challenges.
Strong earnings boost investor confidence
JPMorgan Chase, the largest bank in the United States, reported a profit of $12.9 billion for the third quarter, surpassing analysts’ expectations of $12.1 billion. Although this represents a 2% decline from last year’s period, the bank’s robust earnings have reassured investors. In response, JPMorgan’s stock rose by nearly 5%.
Wells Fargo also posted strong quarterly results, with its shares jumping over 6%. Both banks have cited solid consumer spending as a critical factor in their strong performance despite the ongoing pressure of inflation on lower-income households. Wells Fargo reported a 10% year-over-year increase in credit card spending, while JPMorgan saw a combined 6% rise in debit and credit card sales.
Loan loss provisions and consumer spending
While bank earnings are strong, provisions for potential loan losses are increasing, signaling caution about the future. JPMorgan has set aside $3.1 billion to cover possible defaults, a sharp increase from the previous year. This move suggests the bank is preparing for a potential rise in defaults as some borrowers may struggle to meet debt obligations in a higher interest rate environment.
Despite these concerns, consumer spending remains resilient. JPMorgan’s CFO, Jeremy Barnum, noted that spending patterns are still solid and supported by a stable labor market. Wells Fargo’s CFO, Michael Santomassimo, shared a similar outlook, pointing to steady debit and credit card purchase growth. These trends suggest that the broader economy remains stable, with many investors optimistic about a potential “no-landing” scenario, where economic growth continues without a recession.
Challenges for Regional Banks
While significant banks like JPMorgan and Wells Fargo are thriving, regional banks are still grappling with the aftershocks of the SVB collapse. The failure of SVB, which occurred due to mismanagement and rising interest rates, profoundly impacted smaller banks. Regional banks now face increased costs to attract deposits and are heavily exposed to risky commercial real estate loans as office vacancies rise and property values fall.
The Federal Reserve has since tightened capital requirements to strengthen the banking sector, but smaller lenders face uncertainty. Many regional banks also deal with rising deposit costs, putting additional pressure on their balance sheets.
As the banking sector recovers from the SVB crisis, the ongoing Congressional hearings focus on potential reforms, especially for banks with assets below $250 billion. These discussions could lead to stricter regulations to prevent similar collapses. Meanwhile, SVB is working to rebuild its business with stricter risk management practices and efforts to retain its loyal customer base despite the bank’s earlier troubles.