What Big Banks Are Saying About Inflation & Recession

During Q2 earnings calls, analysts grilled senior executives of the six biggest U.S. banks about recession risks caused by the Federal Reserve's efforts to contain inflation through interest-rate hikes.
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Is the U.S. headed for a recession? And, if so, will it be worse than the Covid slump?

In their second quarter earnings briefings major bank chiefs address those questions, often in response to aggressive probing by securities analysts looking for hints of things to come.

Encouragingly, none of the leaders are predicting an economic doomsday for the U.S. In fact, some CEOs seemed to bridle a bit at analyst suggestions that really dire circumstances are on the way.

Here’s a recap of what was said by the heads of JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, U.S. Bancorp and PNC Corp., based on a review of Q2 2022 earnings transcripts by The Financial Brand

Chase’s Dimon on Navigating Through a Hurricane

JPMorgan Chase Chairman and CEO Jamie Dimon suggested during the bank’s Investor Day in May that a “hurricane” could be on the way, as the Federal Reserve began throttling back inflation by hiking rates substantially and steadily.

But in his mid-July earnings briefing, he spoke more positively — or so it seemed to some. So Mike Mayo of Wells Fargo Securities, a particularly pugnacious analyst, said:

“Could you help me reconcile your words with your actions? … You’re acting like there’s sunny skies ahead. You’re out buying kayaks, surfboards, waverunners — just before the storm. So is it tough times or not?”

Not taking the bait, Dimon responded that his guideline is consistency. “We’ve always run the company consistently… We don’t pull in and pull out and go up and go down and go into markets and out of markets through the storms. You’ve seen [me] do this consistently since I was at Banc One.”

Dimon spoke positively about the economy’s current state — plentiful jobs, higher consumer income, consumer spending 10% over 2022 and 30% over the pre-Covid period, even though some of that comes from gasoline and other essentials rising in price. On the commercial side, “we’ve never seen business credit be better ever in our lifetimes.”

“That’s the current environment,” Dimon continued.

“The future environment, which is not that far off, involves rates going up, maybe more than people think, because of inflation. There may be stagflation. There might be a soft landing.”

— Jamie Dimon, JPMorgan Chase

Dimon’s point was, whatever happens “it’s not going to change how we run the company. The economy will be bigger in ten years. We’re going to serve more clients and we’re going to open more branches. … We’re here to serve clients through thick and thin and we will do that.”

Later, queried again, Dimon said he felt like a broken record, reiterating his points about the consumer’s health.

“Things happen,” he said. “But we’re adults. We know that if you have a recession, losses will go up. We prepare for that and we’re prepared for that because we grow the business over time.”

Later in the briefing Dimon was asked about additions to reserves and he said the bank handled increases to reserves after Covid drove unemployment to 15% in three months. He said he believes the impact of any recession on unemployment would be less severe.

Read More: Chase Reveals Its Strategy for Dominating Retail Banking

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Citi’s Fraser: Europe Will Get Hit Harder than the U.S.

Citigroup’s CEO Jane Fraser addressed risks of a recession in her opening remarks: “While sentiment has shifted, little of the data I see tells me the U.S. is on the cusp of a recession. Consumer spending remains well above pre-Covid levels, with household savings providing a cushion for future stress. And as any employer will tell you, the job market remains very tight.”

Fraser noted that it is very unusual to head into a choppy economy with consumers in relatively good shape.

She believes the U.S. economy “is well-positioned to withstand” recession. On the other hand, she sees Europe headed into a recession as early as fall 2022. China is more of a toss-up. “Its economy is bouncing back,” she said, “but another wave of Covid could be more problematic there.”

“What matters for a bank heading into recession? Capital, liquidity, credit quality and reserves. And we feel very good about all four of them.”

— Jane Fraser, Citigroup

“We’re prepared for a variety of scenarios,” said Fraser. “We run stress tests all the time given the unique set of risks facing the global economy.”

Read More: Meet Citi’s Next CEO Jane Fraser: How She Climbed to the Top in Banking

‘What Cliff?’ Asks PNC’s Demchak

During the PNC earnings briefing veteran analyst Gerard Cassidy of RBC Capital Markets asked Bill Demchak, Chairman, President and CEO, “Are we just going to go off a cliff or something at the end of the year, with some sort of big recession that has frightened everybody about credit quality for banks in general?”

“Look, I don’t think there’s any cliff involved,” said Demchak. “I do think that the trouble ahead lies somewhere in the middle of next year, not any time in the next six months.”

Demchak noted that as PNC continues to address risks seen in the loan book acquired when it bought BBVA’s U.S. operation, its credit has actually been improving.

“But eventually that has to stop,” Demchak continued. “The Fed has to slow the economy to get inflation under control. But I think that’s going to be harder to do than the market currently assumes — and I think it’s going to take longer than the market currently assumes.”

This would return the costs of credit to normalized levels, he said.

“I don’t see any particular bubbles inside the banking system as it relates to credit. You’re just going to see a slow grind, with credit losses increasing over time as we get into the slowdown.”

— Bill Demchak, PNC Corp.

“We assume that, all else being equal, credit quality is going to deteriorate at some pace from here [July 2022] through the next two years,” said Demchak. “I just don’t think it’s going to be all that dramatic.”

He added that “there’s a growth opportunity through a mild downturn for us, just given the way we run our business and the business that will come back into the banking system and out of the capital markets.” He said a recession would hurt banks a little bit, but not the way some may be expecting.

Read More: What Banks and Fintechs Must Do to Survive the Impending Recession

Where Recession Pain May Be Felt First

Even though executives generally spoke of consumer spending still being strong and consumer deposits still being in good shape, there was acknowledgement that some consumers will be hit harder than others. Whether banks are affected will hinge on what parts of the credit risk spectrum they serve.

“The greatest impacts will be on the low- and moderate-income consumers,” said Terry Dolan, Vice-Chair and CFO at U.S. Bancorp.

Dolan acknowledged that much of the impact of inflation has hit these consumers, too, as less of their spending is discretionary as food and fuel prices rise.

“But I would also say that the consumer balance sheet is strong,” said Dolan. “They still have deposit balances that are in excess of where they were pre-pandemic. In part that’s allowing consumer spending to continue.”

U.S. Bancorp’s Andy Cecere, Chairman, President and CEO, said that the company’s consumer deposits were still two to three times in excess of pre-pandemic levels.

“We’re being very disciplined about what we are putting on our balance sheet. While we have had strong loan growth, it could have been stronger. But it wasn’t because we are not putting those deals on that are not appropriate from a credit standpoint, a spread standpoint or a return standpoint.”

— Andy Cecere, U.S. Bancorp

A key point made during a discussion about loan growth during the Bank of America Q2 earnings briefing concerned the bank’s loan-to-deposit ratio. At the time of the call the bank’s ratio stood at about 50%, which is quite low, reflecting the industry’s flush liquidity.

Brian Moynihan, Chair and CEO, explained that the bank doesn’t manage to that ratio, though it has become a touchstone metric for bank liquidity.

“It’s not a number that, at the top of the house, we say that if the number is 62%, it’s good, and if it’s 50%, it’s bad,” said Moynihan. “It’s just the result of running the customer franchise.”

He noted that the bank’s total loans had gone back over $1 trillion again and that the bank gathered deposits based on market conditions and made loans based on those and on credit conditions.

Read More:

Mortgage Impact Continues to Be a Drag

A key lending area that has been hit especially hard by inflation, and the Fed’s aggressive interest-rate hikes, is mortgage lending.

Major banks, including some of those in this roundup, have had to lay off vast portions of their mortgage staffs as rising rates and increasing home prices have dried up much of the new loan market.

Wells Fargo, for one, has had major layoffs, but CEO Charlie Scharf said that the bank had already been working down its participation in the mortgage business.

“If you just go back and look at how big we were in the mortgage business, we were a hell of a lot bigger than we are today,” said Scharf. “All along we have been assessing what makes sense for us.”

Added Scharf: “We’re not interested in being extraordinarily large in the mortgage business just for the sake of being in the mortgage business.”

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