Shares of JPMorgan Chase traded roughly 6.7% higher as of 11:20 a.m. ET today, shares of Bank of America were up 6.3%, shares of Citigroup (C 0.01%) traded 6.3% higher, and shares of Wells Fargo (WFC -0.47%) were up 5.3%.
JPMorgan Chase at its investor day this morning raised its guidance for full-year net interest income (NII) -- the profits banks make on loans, securities, and cash after funding those assets -- to $56 billion from $53 billion just a few months ago. The bank expects the Federal Reserve to lift its overnight benchmark lending rate, the federal funds rate, to a range of 2.75% to 3% by the end of the year. Higher rates tend to benefit NII because most banks have more variable-rate assets that see their yields reprice higher with the federal funds rate than liabilities. JPMorgan also said the bank now has a chance of generating a 17% return on tangible common equity, which is the bank's long-term goal that it didn't think it would achieve earlier this year.
Baked into JPMorgan's guidance is high-single-digit percentage loan growth from 2021 and "modest securities deployment." JPMorgan Chase in its investor presentation also said that "strong consumer and wholesale balance sheets will delay normalization [of credit] past 2022," and that "the U.S. economy remains fundamentally strong, despite recent mixed data."
Because Bank of America and Wells Fargo are even more rate-sensitive than JPMorgan, it makes sense that their stocks would rise with the news. Citigroup is less rate-sensitive than the group but the bank trades at a significant discount to its peers and Warren Buffett and his company, Berkshire Hathaway, recently disclosed a stake in the struggling bank, making it ripe for a rally.
This morning, Bank of America CEO Brian Moynihan also continued to downplay the chance of a recession in 2022, telling CNBC that calls for a recession "get overquoted."
"The probability [of a recession] is rising, the fear is going up, but the reality is that no one is really saying 'there will be a recession,'" said Moynihan, adding, "the notion that people are spending the stimulus down isn't happening yet. It may happen, but it hasn't happened yet."
Moynihan acknowledged that the Fed has a difficult task ahead of aggressively raising rates to tame inflation without tipping the economy into a recession. But he added that consumer balance sheets remain extremely strong right now and that rising wages could help ease the headwinds that rising rates are having on the housing market. Bank of America recently raised its minimum wage across the company to $22. Moynihan added that slowing mortgage applications are related to less refinancing activity but not less home purchasing.
I think Moynihan said it perfectly. There is a higher chance of a recession, but it's not a foregone conclusion with the consumer still very healthy and still a chance that the Fed can engineer a soft landing.
JPMorgan Chase said NII in the fourth quarter will hit an annual run rate of $66 billion, so if the economy doesn't tip into a recession NII at these large banks could grow materially in 2023.
With these large bank stocks all down significantly this year, I like all of them. JPMorgan Chase and Bank of America are looking at better guidance and Wells Fargo and Citigroup are at different stages of their perspective transformation plans and have lots of upside if they can execute.