Bank Stocks Fall, Treasuries Hold Firm: What Q3 Earnings Reveal About Credit Risk

JPMorgan Chase, Goldman Sachs, Citigroup and Wells Fargo reported their third-quarter results on October 13. Earnings offered little evidence of weak bank fundamentals, yet all four stocks fell: JPMorgan lost 0.86%, Goldman 0.2%, Citi 5.6% and Wells Fargo 3.1%.

The 10-year Treasury yield, meanwhile, briefly fell by about 5 basis points during the session. Had investors been positioning for higher interest rates, one would have expected long-term yields to rise, with banks potentially benefiting as loans repriced and lending margins improved. Instead, Treasuries held firm while bank stocks bore much of the selling.

The S&P 500 finished just 0.02% lower. The contrast extends beyond a single session: since mid-August, the KBW Bank Index has fallen about 12%, while the S&P 500 has been broadly flat. This was the divergence worth watching in the previous article on bank earnings and inflation. It suggests investors are looking beyond the level of interest rates to the credit costs that could emerge if rates remain high.

1. Strong annual growth, weaker quarterly momentum

Net income increased year on year at all four banks: 6% at JPMorgan, 29% at Goldman, 40% at Citi and 6.5% at Wells Fargo.

But current earnings alone do not determine a bank's market value. They describe the period just ended; investors also need to judge what comes next. JPMorgan's investment-banking fees illustrate the distinction: they rose 14% from a year earlier but fell 8% from the previous quarter. Revenue and net income also fell quarter on quarter at all four banks.

Annual comparisons show how much earnings have improved. Sequential changes, together with management guidance, help investors assess whether that growth can be sustained.

JPMorgan had guided to growth in the mid-to-high teens for both trading revenue and investment-banking fees. Both came in at the lower end of that range. On the earnings call, Dimon said investment-banking revenue had grown at a mid-teens rate, while activity had moderated during the quarter.

The annual growth figures were strong. The more immediate concern was that momentum had slowed.

2. Stable charge-offs, rising provisions

The credit figures reveal a similar tension. Household-credit indicators remain stable: JPMorgan's credit-card net charge-off rate fell from 3.15% to 2.91%, Wells Fargo's from 4.02% to 3.73%, and Citi's from 4.0% to 3.66%. These consumer-credit measures do not yet point to clear deterioration.

JPMorgan reiterated its forecast for a full-year 2026 credit-card net charge-off rate of about 3.2%, below its earlier expectation of nearly 3.4% and below last year's level.

Even so, banks are making greater provision for credit losses. Wells Fargo's provision expense increased 51% year on year, while Citi's quarterly provision for credit losses rose 6% year on year. A provision is an accounting expense that reflects expected credit losses; an increase does not, by itself, mean that more borrowers have already defaulted. It can signal a more cautious assessment of the risks ahead, even while current charge-off rates remain stable.

3. The risk lies in refinancing

High interest rates do not necessarily hurt banks at first. As loans reprice, lending income can rise and net interest margins can improve. The concern is what happens to borrowers' ability to repay if rates stay high for an extended period. Debt taken out when borrowing was cheap will become more expensive to service when it is refinanced.

Investors therefore have reason to look beyond today's bad debts and ask whether future credit costs will rise.

Bank of America's latest monthly fund-manager survey offers another perspective. The median respondent put the 10-year Treasury yield at 5.9% as the level that would prompt a shift from equities to bonds, compared with its October 13 close of 5.21%. A disorderly rise in bond yields was also the most frequently cited tail risk, selected by 32% of respondents.

4. Dimon's warning is about exposure, not a yield target

On the earnings call, JPMorgan Chase Chairman and CEO Jamie Dimon described how a further rise in long-term yields could affect borrowers. Refinancing would become more expensive, and credit spreads could widen.

He stressed that this was not a prediction that the 10-year Treasury yield would reach 6%. He was urging investors to prepare for that possibility. His comments draw attention to which borrowers and businesses would face pressure if financing costs rose further. The larger the debt burden, the greater the potential impact when that debt has to be repriced.

5. What to watch in September CPI

September US CPI is due tonight at 20:30 Beijing time. It is the last major inflation report before the next Federal Reserve policy meeting.

Market forecasts put headline inflation at 3.6%–3.7% year on year, up from 3.4%. The expected monthly increase in core CPI, however, has eased from 0.3% to about 0.2%. The headline and core forecasts thus point in different directions.

The key question is not simply whether headline inflation rises, but whether core inflation continues to cool. Further easing could lead investors to reassess the policy outlook. A renewed increase would bring the prospect of persistently high rates—and the resulting pressure on credit costs—back into focus.

For bank investors, CPI matters for more than the next interest-rate decision. It also informs expectations for borrowers' financing conditions and the credit risks banks may face.