Wall Street Banks' Q3 Profits Rise; Moody's Warns on Capital

A strong quarter that came with a warning

America's biggest banks had a profitable third quarter. Moody's Ratings now says that strength came partly at the cost of their capital cushions. In a report covering Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, the agency called the group's results solid and credited supportive capital markets and a benign economy.1 It also found that the common equity tier 1 (CET1) ratio fell from the previous quarter at four of the six banks and held flat at the other two. Moody's described this as a credit-negative trend that has been building for several quarters.1

That warning is the most useful way to read this earnings season. Profit growth was real, broad and in places spectacular. But the banks are spending capital to grow their balance sheets and pay shareholders faster than they are adding to it, and Moody's said their buffers above regulatory minimums keep getting smaller.1

The numbers behind the headline

Taken together, the results were large. One tally of the six banks' filings puts their combined third-quarter profit at about $43.5 billion on revenue of roughly $165 billion, with all six reporting on October 13 or 14.16 JPMorgan earned the most, with $15.3 billion of net income on $50.2 billion of revenue. Bank of America came second at $6.9 billion reported, or $8.1 billion adjusted. Wells Fargo, Goldman, Citi and Morgan Stanley followed.16

Moody's said the gains came from three places: higher net interest income, rising wealth and asset management fees, and strong capital markets revenue.1 Within markets, the agency singled out equities trading, prime financing, and equity and debt underwriting. It called equities the standout business at every bank, driven by heavy client activity, big differences in how individual stocks moved, and larger prime brokerage balances.1

The bank-by-bank figures support that. Equities revenue rose 72% at Goldman, 49% at JPMorgan, 41% at Morgan Stanley, 14% at Citi and 11% at Bank of America.16 Goldman's equities desk brought in $6.44 billion, and its equities financing business nearly doubled to a record $3.37 billion.16 Morgan Stanley's equities revenue of $5.8 billion beat analysts' roughly $4.9 billion estimate by a wide margin.19

Rates help lending, but not bond trading

The quarter played out against a change in monetary policy. On September 16 the Federal Reserve raised its benchmark rate by a quarter point to 3.75%–4%, its first increase since July 2023.2328 The decision was unanimous. Sixteen of the 18 officials who submitted projections expect rates to end the year higher still.26 The median projection points to 4.1% at the end of 2026 and holds there through 2027.27

For lending businesses, higher rates have helped so far. JPMorgan's net interest income rose 13% to $27.1 billion, with average loans up 10% and deposits up 8%.22 Bank of America's net interest income rose 8% to $16.4 billion, and its net interest yield improved by 15 basis points.22 Moody's added some nuance: net interest income grew across the group even though net interest margins were mixed. In other words, larger balances did more of the work than wider spreads.1

Rising yields hurt the bond trading desks. Fixed income was flat or down at most banks, and the rate jump weighed on bond trading across Wall Street.1316 JPMorgan's fixed-income trading revenue fell 4% to $5.4 billion, and Goldman also reported an unexpected drop.1714 Citigroup was the exception, with fixed-income revenue up 4% to $4.4 billion.17 So the same rate move that supported lending margins was a drag on one of the banks' main sources of trading revenue.

The main risk on the lending side is deposit costs. Ahead of the reports, analysts warned that banks might have to pay savers more to keep deposits after the Fed's hike, which would eat into the benefit of higher loan yields.24 Moody's flagged a related medium-term concern: continued growth in markets financing, corporate deposits and rate-sensitive "higher-beta" balances could eventually change banks' liquidity or funding costs.1 For now, the agency saw no sign of funding or liquidity stress and called the banks' liquidity a credit strength.1

Beats, misses and analysts' estimates

Moody's described the group as strong overall, but the results against expectations varied widely. Goldman beat its earnings estimate by about 32%, Citi by 7.1%, Morgan Stanley by 3.4% and Wells Fargo by 1.1%. Bank of America missed by 1.8% and JPMorgan by 3.0%.13

JPMorgan's shortfall was the surprise. It reported $5.57 per share, or $5.75 excluding $658 million of securities losses. That was still below the roughly $5.90 analysts expected, and the bank had beaten estimates in 16 of its previous 20 quarters.11 Revenue of $50.17 billion also missed the $51.23 billion forecast, ending a run of eight straight revenue beats.12 Reports differ on the size of the profit gap. Some compare JPMorgan's $15.3 billion of net income with a consensus of about $15.9 billion.20 Others cite a forecast of $16.3 billion.17 The difference probably reflects estimates gathered at different times, but either way JPMorgan fell short.

Goldman's estimate also varies by source, at $13.09, $12.86 and $12.44 per share, and its actual $17.01 cleared all of them easily.1213 Its advisory revenue reached a record $1.65 billion, though coverage noted that its deal pipeline shrank.11 Bank of America's net income fell 17% after a $1.2 billion regulatory charge related to money-laundering and sanctions violations.19

None of this helped the stocks. All six fell on the day they reported, from a 0.2% slip at Goldman to a 5.6% drop at Citigroup.13 Investors seemed less interested in the past quarter than in whether equity-driven trading results can be repeated.

Credit is normalizing, not deteriorating

On loan quality, Moody's was mostly reassuring. It described consumer credit as stable or improving and corporate credit as solid. Its main theme was a return to normal levels rather than stress: card losses are above the unusually low post-pandemic levels, but several banks reported card metrics that held steady or got better.1 Corporate problems were isolated losses, not a broad decline.1

The bank-level numbers mostly agree, with a few weak spots. JPMorgan's provision for credit losses fell to $2.74 billion from $3.40 billion, though the prior-year figure included a $2.2 billion charge tied to the Apple Card transaction.15 Goldman's credit-loss provisions in its banking and markets segment rose sharply from a year earlier. Citigroup said profits in its card business fell 8%, partly because of higher provisioning.15 These are worth watching, but they fit Moody's view that credit is normalizing rather than breaking down.

The capital question

The capital findings are where Moody's adds the most to the earnings coverage. Some summaries of the quarter called the banks' capital ratios healthy and put CET1 levels between about 10% and nearly 15%.18 That is accurate in absolute terms. Moody's, however, was looking at the direction of travel. It said buffers are shrinking because banks keep using capital for balance-sheet growth, expansion of risk-weighted assets and shareholder payouts.1

JPMorgan's buyback decision shows the pressure clearly. The bank cut net share repurchases to $664 million from more than $6 billion the quarter before, with its CET1 ratio at 13.9%.1617 Jamie Dimon said JPMorgan sees opportunities to put its roughly $30 billion of excess capital to work at attractive returns instead of prioritizing buybacks.17 Bank of America took the opposite approach and bought back $6.0 billion of stock.16

In our view, the two choices illustrate the trade-off Moody's described. A bank can fund growth in loans and trading inventory, or it can return cash to shareholders, but strong capital markets make it hard to do both without running down the buffer. JPMorgan has chosen growth. Banks that keep paying out heavily while also growing their balance sheets are the ones whose ratios are most likely to keep falling.

What comes next

The outlook depends on a few things. The Fed meets again on October 28.21 Officials' projections lean toward another hike, while J.P. Morgan's own research team expects the Fed to hold for the rest of 2026.2125 Another hike would likely support net interest income further, but it could add to deposit-cost pressure and weigh on bond trading again.

The bigger risk is how much the quarter depended on stock markets. Coverage noted that the results leaned heavily on equity markets near record highs, and equity revenue tends to fall first when markets turn.16 Expenses are also rising, including a 12% increase at JPMorgan.18

The overall picture is mixed. Profits are up, credit is stable and liquidity is strong. But the strong results rest on trading businesses that can be volatile, and the capital cushion that would absorb a downturn has been shrinking for several quarters, as Moody's pointed out. Investors who sold the stocks even after the beats appear to share that concern.