Banks’ Second Quarter Earnings Conclusions

Investors have been reviewing the company’s first batch of earnings this quarter to monitor the chances of a recession, the state of consumer spending and the outlook for the markets. Reports from the nation’s largest banks, coming at the start of “earnings season,” as Wall Street calls it, sent mixed signals.

Second quarter profits across all banks were down compared to the same period last year. The last two banks to open their books were Bank of America, where quarterly profit fell by a third, and Goldman Sachs, where profit fell by half.

But in some cases, the earnings decline was not as severe as analysts expected. Consumers continued to spend and borrow. The markets were volatile, but there was money to be made in trading. And banking leaders struck a cautious tone, but none thought a recession was brewing.

“It’s a challenging market, but I think it’s important to say it’s not a rocky 2008,” James Gorman, chief executive of Morgan Stanley, told analysts.

Bank bosses said they expected the economy to slow but not slide into an outright contraction.

“Nothing in the data that I see indicates that the United States is on the verge of recession,” Jane Fraser, chief executive of Citigroup, said in a conference call. “While a recession could happen, it is highly unlikely to be as severe as others we have seen.”

Executives at JPMorgan Chase also said there were no clear signs of a recession yet. Retail banking customers were still spending money on discretionary purchases such as travel and restaurants, they said.

“We have looked very carefully at our actual data,” Jeremy Barnum, JPMorgan’s chief financial officer, said on a call with reporters. “There is essentially no evidence of real weakness.”

Michael Santomassimo, Wells Fargo’s chief financial officer, said the bank’s management was preparing for a variety of scenarios, but noted “things are likely to get worse.”

Loans increased at almost all banks, in a positive sign for the economy. Consumers and businesses increased their borrowing from the largest banks by an average of 6 percent in the second quarter compared to the same period last year.

The biggest gains came in corporate loans, which rose nearly 20 percent in the second quarter from a year earlier at both JPMorgan and Bank of America. Home mortgages slowed in the quarter, a reflection of higher interest rates, but were still up at most banks. And for the most part, consumers and business customers continued to pay their debts on time. For example, at JPMorgan, only 0.5 percent of customer credit card loans were 90 days or more past due.

Almost all banks, citing economic uncertainty, said they expected an increase in the number of borrowers, particularly individuals, who would fall behind on their loans. The six largest banks collectively expect almost $2 billion more in credit losses over the next year than they did three months ago.

Most investors lost money on their investment accounts in the second quarter, but the market volatility was a boon for banks. That was particularly true at Goldman Sachs, where trading revenue rose 31 percent, outperforming rivals. Citigroup also reported better-than-expected results buoyed by higher trading fees and market gains.

In the wake of the financial crisis a decade ago, big banks, prompted in part by regulators and changes in the law, have vowed to avoid making risky bets on the market. Now many of them are generating a growing share of their income from trading, although banks still say they are taking less risk than before.

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