As the third quarter earnings reports rolled in for the six largest U.S. banks—JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley—investors paid close attention for signs of economic weakness. While the economy showed recovery, concerns around commercial real estate, especially office space exposure, remain a lingering concern. Despite headwinds, these institutions reported relatively strong earnings, supporting the feeling that the U.S. economy is expanding, slowly but surely. In fact, JPMorgan Chase’s CFO, Jeremy Barnum said: “These results are consistent with a soft landing. That’s pretty consistent with this kind of Goldilocks economic situation.”
Net Interest Income is a Mixed Bag
The banks reported varied outcomes regarding net interest income (NII), highlighting the overall resilience of their financial positions. JPMorgan Chase recorded a 3% increase in NII, reaching $23.5 billion, demonstrating its ability to navigate a shifting interest rate environment. While Wells Fargo experienced a decrease in NII (although beating expectations), down from $13.1 billion in the same quarter last year to $11.7 billion this year, the outlook remains mixed for many banks as they continue to adjust to economic shifts. Bank of America, for instance, saw a 3% year-over-year decline in NII to $14 billion, driven by higher deposit costs. Although the bank’s CFO, Alastair Borthwick, noted that NII growth is expected in the fourth quarter, he acknowledged that future interest rate cuts could hinder NII in the months ahead.
Most analysts believe that there will be two more interest rate cuts this year (each of 25 bps). Lower rates would put downward pressure on the banks’ earnings from interest-bearing assets until loan transaction activity surges meaningfully. And so far, that has not happened. Wells Fargo’s Michael Santomassimo, SVP and CFO said about the recent Fed rate cut: “The 50-basis-point reduction is helpful but is not by itself a factor that will drive people to borrow or not.” For Wells, average loans declined 6% from a year ago, driven by continued reductions in their CRE portfolio.
Investment Banking Flourishes
Investment banking emerged as a significant bright spot for the big banks, with robust performance in mergers and acquisitions, as well as equity underwriting. For example, Morgan Stanley’s investment banking revenue surged by 56%, while both JPMorgan Chase and Goldman Sachs enjoyed a 31% rise in fees. Goldman Sachs also reported $3.8 billion in asset and wealth management revenue, constituting more than a quarter of its total revenue.
This strong investment banking performance indicates a vibrant financial sector, even as banks recalibrate their strategies in response to ongoing risks associated with real estate loans, particularly from the office sector.
Provisions for Loan Losses Reflect Caution
In response to the still-challenged CRE landscape, banks have adjusted their provisions for potential loan losses. JPMorgan set aside $3.1 billion for credit losses, a significant increase compared to previous quarters, signaling a proactive approach to managing risk. Similarly, Citigroup increased its provision to $315 million, up from $125 million in the same period last year.
Wells Fargo, however, took a different stance, reducing its provision for credit losses. CEO Charlie Scharf acknowledged that office-related losses would continue to present challenges. “While losses in the commercial real estate office portfolio declined in the third quarter, market fundamentals remained weak, and we still expect commercial real estate office losses to be lumpy as we continue to actively work with our clients,” said Santomassimo.
Goldman Sachs highlighted gains in its real estate investments within its equity investment line for Q3. CFO Denis Coleman emphasized that Goldman moved early to mitigate these risks, including impairing its office-related CRE portfolio by over 45% last year. Additionally, a significant part of the year-over-year increase in real estate investments was due to the closure of a $9 billion fund in the prior year.
Resilience in Consumer Spending with a Caveat
Despite uncertainties in the CRE market, consumer spending demonstrated resilience in Q3 2024. JPMorgan reported a 6% year-over-year increase in debit and credit sales volume, while Wells Fargo noted a 10% rise in credit card point-of-sale volume. However, more consumers are carrying balances from month to month rather than paying off their balances. Not surprisingly then, several banks charged off more loans in the third quarter than the same quarter last year.
Office Challenges Ahead
As the dust settles on Q3 2024 earnings, the outlook for CRE, particularly office properties, remains uncertain. While big banks are relatively less exposed than their regional counterparts, they are not immune. Charles William Scharf, Wells Fargo President andCEO said regarding CRE office, “things aren’t getting better, and it is kind of more of the same but it’s impacting more properties. Maybe to some extent, there is a little bit of contagion to properties that are fairly well leased, but people are looking for better deals because they think there’s weakness out there.”
Wells’ Santomassimo added that “it’s going to take a while to play out. This is not something that will take a quarter or two and be over. It will play out over a longer period of time.”
Bank of America saw lower losses from office exposure and in its loan business, had a 6% drop in CRE loans.
Morgan Stanley, which had net charge-offs of $100 million for CRE and corporate loans commented that “it’s almost as though some of the credit changes have been working themselves through the market.”
But it’s not all bad in office. Santomassino said new and renovated buildings in good locations are doing fine. Across the U.S., it’s the older buildings that face the most challenges. Overall, Q3 earnings were stronger than expected, but the challenges in CRE office space will continue to be a source of concern for the major banks. Analysts predict that the Federal Reserve’s potential rate cuts in 2025 could provide some relief to the sector, but the full impact may take time to materialize. With billions in CRE loans due for refinancing in the coming years and market demand for office space still shaky, the sector is likely to remain a significant pressure point in future earnings reports.
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