High interest rates are getting more challenging for even the biggest banks

A key revenue source for three giant banks fell during the first three months of the year, showing that even the biggest financial institutions are struggling with the same challenges facing the rest of the industry as interest rates remain elevated.

JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) all said Friday that their net interest income dropped from the fourth quarter to the first quarter. It was down 4% at JPMorgan, 4% at Wells Fargo, and 2% at Citigroup.

For JPMorgan, it was its first sequential drop in nearly three years. Its stock fell by more than 6%, its largest single-day drop since 2020. The stock of Citigroup was down nearly 2%, while Wells Fargo was flat.

Net interest income is a critical measure for many banks, since it measures the difference between what banks earn on their assets and pay out on their deposits.

Smaller banks have struggled to boost this measure over the last year as interest rates and deposit costs soared. Now there are some signs in the first quarter that high rates are starting to weigh on growth even at the nation’s largest lenders.

JPMorgan said in a press release that its net interest income dropped due to "deposit margin compression and lower deposit balances."

Depositors are seeking out higher yields, as they have at smaller banks, and moving their money into products such as certificates of deposits where JPMorgan has to pay a higher rate.

"As customers move out of checking and savings, they may choose to go into CDs," CFO Jeremy Barnum told reporters Friday in response to a question from Yahoo Finance. "That means that the bank is paying more for the internal migration."

"That is the sort of deposits migration that we’re expecting" for the rest of 2024, he added.

It is certainly still true that the big banks are better positioned than their rivals to withstand a period of elevated interest rates and that they will still be able to earn plenty of money from lending.

Citigroup’s net interest income in the first quarter, for example, was $1 billion higher than expected, and JPMorgan did boost an estimate of net interest income for all of 2024 to $89 billion, excluding trading, up from a previous estimate of $88 billion.

But that was flat when compared to 2023. Both Wells Fargo and Citigroup expect their net interest income to be down for the full year.

'Rates might be higher'

Deposit pricing pressure is also rising at Wells Fargo and Citigroup, which disclosed they are shelling out more for that funding than a year ago.

That pressure is likely to intensify now that investors no longer expect a rate cut from the Federal Reserve in June, due to hotter-than-expected inflation data this past week and a surprisingly resilient economy.

Wells Fargo's average deposit cost was 1.74%, which was higher than 1.58% in the fourth quarter and 0.83% in the year-ago period. Its overall profits dropped 7% from a year earlier.

"Rates might be higher than what people expected a week ago," Wells Fargo Chief Financial Officer Mike Santomassimo told analysts. "We do have to wait and see how clients are going to react."

At Citigroup, its average rate paid on deposits rose to 3.70%, up from 3.61% from the previous quarter and 2.72% from the year-ago period. Its overall profits dropped 27% from a year earlier.

Citigroup also provided some updates about an ambitious restructuring of the bank that is resulting in thousands of job losses. It said it eliminated 7,000 positions as part of a target of reducing headcount by 20,000 by 2026.

'We are a little bit cautious'

There were a number of positives in the banks' results Friday.

Overall profits for JPMorgan were still up by 6% from a year ago, to $13.4 billion, beating Wall Street expectations.

It also set aside less money for future loan losses and investment banking fees jumped 21% to $2 billion, a sign that a Wall Street revival may be underway.

But most of that came from debt underwriting, as opposed to advisory work.

"We are a little bit cautious," Barnum said about any pickup in M&A activity.

JPMorgan’s boss, Jamie Dimon, offered more warnings about the road ahead for the US economy, repeating a theme he hammered home in his annual shareholder letter released earlier in the week.

"Many economic indicators continue to be favorable," Dimon said. "However, looking ahead, we remain alert to a number of significant uncertain forces."

He cited wars and geopolitical tensions, "persistent inflationary pressures" that "may likely continue," and a campaign of quantitative tightening from the Federal Reserve.

Dimon has said he is prepared for rates to go as high as 8%. When asked by Yahoo Finance on Friday about the prospect of rates remaining higher for longer, he said "rates being higher on their own isn't that important, what is important is why."

"If it is because of stagflation that's obviously negative. If it’s because of, you know, healthy growth, that's actually pretty good."