Wells Fargo and Citi Customers Are Still Spending

Some discretionary spending is down: Wells Fargo said debit card holders were buying fewer clothes and doing less home improvement. High inflation is also a factor, Mark Mason, Citigroup’s chief financial officer, noted. Things like fuel and flights just cost more. But as Mason said, the feel-good leisure spending is hard to square with worries about rising costs of living and the sharp declines in consumer expectations about income and employment in Conference Board surveys this year.

Maybe people are just having some nihilistic fun before the storm hits. Wells Fargo said spending slowed a bit in May and June, so some consumers might be wrapping things up and heading home already. But all three banks also said consumers still have good cash buffers and the flexibility to spend on the things they want. None of the banks are yet seeing any signs of stress among borrowers, either. Provisions against bad loans are rising, but a lot of that is due to growth in lending, not because more people are late in making repayments. 

Lower-income households are likely suffering more, and the pain from gas and grocery costs will keep getting worse for them. But that’s more a problem for society than it is for banks. Low-income borrowers just aren’t a big part of the lending books at banks like Wells Fargo, Mike Santomassimo, its chief financial officer, said.

In terms of what could change, the key factor to watch is employment. Bank results have raised warning flags in two areas that investors should keep an eye on: construction and highly indebted companies.

Wells Fargo reported a collapse in mortgage-related business Friday, with second-quarter revenue down 53% compared with the same period last year and down 35% from the first quarter. On Thursday, JPMorgan reported mortgage revenue fell 31% year over year. It has already started laying off hundreds of workers in home lending, Bloomberg News reported last month. New and existing home sales have both dropped sharply this year as interest rates have risen, while total construction spending dipped slightly in May for the first time since September 2021, according to data from the Federal Reserve Bank of St. Louis. If people aren’t buying new houses, construction work will obviously suffer. The decline in home improvement spending noted by Wells Fargo is closely linked to the same trend. When Goldman Sachs reports on Monday, its recently acquired GreenSky lending business could also suffer.

The other area that could hurt employment is companies that start to struggle with their debt burdens. The first place to look for this is among those whose finance comes from the floating-rate high-yield loan market. Investors have fled this market, sending borrowing costs higher on top of the effect of already rising base interest rates. For banks, the early pain of this has been visible in the markdowns they have taken on leveraged loans that they have not been able to sell. Wells Fargo took a $107 million hit in the second quarter, while Citigroup’s was $126 million. JPMorgan reported a $257 million markdown Thursday.

Bankers don’t expect this business to pick up much over the rest of this year, which is bad for their investment banking fees. But it also makes it much harder for highly leveraged companies to refinance loans or rearrange their financing structure if they start to struggle with debt costs.

JPMorgan, Citi and Wells Fargo look in good-enough shape when it comes to the health of Main Street lending and spending. But look closely and there are signs in the banks’ results of what could go wrong in the economy. Consumers look healthy even if they say they’re not happy. This puzzle will get solved one way or another eventually. 

More From Writers at Bloomberg Opinion:

• JPMorgan’s Bad Earnings News Really Isn’t So Bad: Paul J. Davies

• Inflation Is Even Worse If You Measure It the Proper Way: Justin Fox

• Private Equity Targets a Risky Stagflation Bet: Chris Hughes

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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