Welcome to The Bottom Line, our new series on select quarterly sector earnings. Each edition cuts through the numbers, using Hebbia to explain their implications for markets and highlight what to watch next.
Q2 results from the largest US banks reveal a tension that may define the rest of the year. Consumer credit is weakening, while capital markets, trading, and asset management are improving amid greater clarity on tariffs. Will consumer spending continue to slow and weigh on loan growth? Is the recent strength in corporate earnings a temporary boost, or a signal of sustained momentum? These are the types of questions we’re asking Hebbia as we analyze bank earnings for the remainder of the year.
The rate cycle gave banks a powerful tailwind, widening spreads with every hike. That tailwind has faded. Deposit betas have caught up, funding competition is intense, and loan yields have stopped climbing.
The shift showed in Q2: NII fell sequentially at JPMorgan, Bank of America, and Citi, while Wells Fargo was flat. Management commentary was cautious, with guidance implying stable to lower NII through year-end.
Banks can no longer rely on the Fed to drive earnings. Growth now depends on market activity, client flows, and disciplined expense management. For those with diversified revenue, this transition is manageable. For banks leaning on lending spreads, especially regional banks, it will be more painful.
Consumers are still spending, but rising delinquencies suggest the strain of higher borrowing costs. JPMorgan’s card losses rose 17% YoY, Citi’s charge-offs hit 3.9%, and Wells Fargo boosted provisions 39% QoQ. Specialty lenders painted the same picture: Capital One’s charge-offs reached 5.3%, Discover’s climbed to 4.1%, and Ally’s auto losses touched their highest level since 2019.
These losses are not recessionary, but they are meaningful. However, during the 2008 financial crisis, charge-offs on credit cards peaked above 10%, far higher than current levels. Today’s figures signal stress among lower-income borrowers rather than a systemic credit or recessionary event.
For the banks today, higher provisions cut into profitability, and tighter underwriting slows loan growth. The weakest borrowers are showing stress, putting the question of a soft landing into full focus again. Banks exposed to subprime credit or unsecured lending face a tougher setup heading into H2.
After two years of stagnation, capital markets are turning. Advisory revenue rose double digits at Goldman Sachs, Morgan Stanley, and JPMorgan. Equity issuance is reopening, and M&A pipelines are described as the strongest in several quarters.
These businesses can offset the drag from falling spreads. Even a modest recovery has an outsized earnings impact for banks with large market franchises. The sustainability depends on stable rates and corporate confidence, but for now, capital markets are one of the few clear tailwinds in the sector.
Trading businesses remained solid in Q2. Fixed income desks benefited from clients repositioning around macro themes, like shifting rate expectations, persistent inflation risks, and geopolitical uncertainty.
The value here is defensive. Trading has consistently delivered baseline earnings during a volatile 18 months for other lines. For Goldman, Morgan Stanley, and JPMorgan, these businesses help smooth results and reduce reliance on rate spreads. Should volatility rise more later in the year, trading could even shift from stabilizer to growth driver.
Wealth and asset management continued to build momentum, with strong client inflows and rising fee income. Wealth management saw strong inflows as investors grew more confident with stabilizing markets and the prospect of easing interest rates. Clients increasingly sought professional guidance to navigate economic uncertainty, boosting demand for managed and diversified investment products.
These businesses are strategically important because they are less tied to rates and scale efficiently across larger client bases. For Morgan Stanley, wealth management is now the anchor of its earnings model, while JPMorgan leverages its scale to grow fees steadily. In an environment where spreads are narrowing, this stability is a differentiator.
Q2 earnings appear strong, driven by increased corporate activity, greater clarity around tariffs, and growth in wealth management. However, banks are adjusting their guidance amid uncertainty. It remains to be seen whether capital markets activity will sustain its current pace or if consumer credit will further deteriorate. With potential rate cuts ahead, banks that rely heavily on lending spreads—particularly regional banks—will need to adapt to maintain profitability. These are the dynamics I’ll continue to track and incorporate into Hebbia as I monitor the sector.
