Big U.S. bank profits fall on insurance fund charges, falling lending margins

WASHINGTON (Reuters) - Major U.S. bank fourth quarter profits fell on Friday as lenders put aside cash to replenish a government insurance fund dented by last year's bank failures, and as the rising cost of retaining deposits ate into margins.

JPMorgan, Wells Fargo, Bank of America, and Citigroup, the country's largest lenders, showed signs that a boost from high U.S. Federal Reserve interest rates that had allowed them to make more on lending may be fading.

The Fed had hiked rates in a bid to tame runaway inflation, but with price increases slowing, the potential pace of interest rate cuts this year, and whether the economy will avoid a recession, is the key question hanging over markets. All the banks struck an upbeat tone on the economy, and said consumers were resilient.

Jamie Dimon, CEO of JPMorgan Chase, the biggest U.S. bank and a bellwether for the economy, said markets were expecting a soft landing, but sounded a note of caution on inflation due to a need for more government spending on green energy, healthcare and the military.

"This may lead inflation to be stickier and rates to be higher than markets expect," Dimon said.

U.S. consumer prices increased more than expected in December, with Americans paying more for shelter and healthcare.

JPMorgan gained 2.75% in early trading and Citi rose 3%, while Bank of America fell 0.4% and Wells Fargo was down around 1.4%.

The banks combined set aside more than $8 billion to refill the Federal Deposit Insurance Corporation's deposit insurance fund (DIF), which took a $16 billion hit after Silicon Valley Bank and two other lenders failed last year.

Beyond that one-off hit, the picture was mixed.

Profits at JPMorgan Chase fell in the fourth quarter, but it posted a record annual profit of $49.6 billion and net interest income (NII), the difference between what banks earn from loans and pay to depositors, was up 19%.

Bank of America's profit shrank on the DIF charge, a one-off hit on how it indexed some trades, and a 5% decline in its NII as the bank spent more to keep customer deposits and demand for loans stayed subdued amid high interest rates.

Of the four, Wells Fargo was the only lender to post a jump in profits, thanks to cost cuts, beating analyst expectations. But it warned that 2024 could be 7% to 9% lower than a year earlier.

Citi, the most global U.S. bank, swung to a surprise $1.8 billion loss for the quarter on the FDIC charges and as it stockpiled cash to cover currency risks in Argentina and Russia. Citi will cut 20,000 jobs over the next two years, its Chief Financial Officer Mark Mason said.

All the lenders all set aside more money to cover souring loans.

(Reporting by Michelle Price, Editing by Nick Zieminski)