(Bloomberg) -- Investors who plowed into shares of the largest US banks in recent months, hoping that slow Federal Reserve rate cuts would keep goosing profits, are getting a reality check.

JPMorgan Chase & Co. and Wells Fargo & Co. both reported net interest income — the earnings they generate from lending — that missed analysts’ estimates Friday, as executives pointed to increasing funding costs. At JPMorgan, NII slipped from the prior quarter for the first time in almost three years, with Chief Executive Officer Jamie Dimon predicting the bounty from elevated rates will normalize instead of soaring ever higher.

Shares of the largest US bank fell the most since 2020.

“The most bullish JPM fans were hoping for a bigger upside guide than we got,” Evercore ISI analyst Glenn Schorr wrote in a note. “As Jamie has been telling us, the beat-and-raise party had to end at some point.”

With stubborn US inflation making it more likely that the Fed will have to delay interest-rate cuts, shareholders were eager to hear how much more that might boost revenue from lending. Instead, banking executives took turns talking about how depositors are chasing higher returns on their savings. At Wells Fargo, deposits that don’t pay interest slumped 18% from a year earlier, while those that do jumped.

“We’re continuing to see that migration in some of the businesses, particularly in consumer,” Chief Financial Officer Mike Santomassimo told reporters on a conference call.

Shares of JPMorgan, which had climbed by a third in the prior six months, tumbled 6.5% in regular New York trading, their worst performance since June 2020. Wells Fargo slipped 0.4%.

‘Ultra-Conservative’ Guidance

JPMorgan and analysts were on the other sides of the debate over net interest income just a few months ago. In January, the bank forecast that it would rise to $90 billion this year, including from markets, while analysts expected it to slip. This time, many analysts were waiting on the firm to lift that guidance — yet it refrained.

While the bank’s net interest income rose 11% from a year earlier, it was down from the fourth quarter, the first sequential drop in 11 periods. On a call with analysts, the dean of Wall Street bank CEOs talked broadly about geopolitical tensions and inflationary pressures.

“We do not know how these factors will play out,” said Dimon, 68.

JPMorgan’s guidance on net interest income “strikes us as ultra-conservative,” Piper Sandler analyst R. Scott Siefers wrote in a note to clients. “The unchanged outlook will disappoint investors a bit and could weigh on the stock.” Still, it “now leaves room to be revised upward later.”

Wells Fargo also maintained its forecast for 2024, expecting net interest income to decrease 7% to 9% from last year’s level.

As banking giants kicked off the industry’s quarterly earnings reports Friday, Citigroup Inc.’s profit beat analysts’ estimates by the widest margin.

The firm draws more revenue from outside the US than competitors, blunting how much the Fed’s timing impacts earnings. And with the path for rates becoming clearer, more corporate clients sold bonds, helping its capital markets desks reap a windfall of fees.

“We’re everywhere geographically,” which provides a hedge against interest rates, CEO Jane Fraser told analysts on a call. “The difference for us versus others is the strength of that corporate base, and they tend to be a more stable base.”

--With assistance from Bre Bradham, Hannah Levitt and Todd Gillespie.

(Updates stock prices in third and seventh paragraphs.)

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