Big banks beat profit expectations but warning signs grow
(Reuters) – Three big U.S. banks reported strong earnings on Tuesday, even as warning signs emerged that the playing field is beginning to tilt against the financial industry.
FILE PHOTOS: Signs of JP Morgan Chase Bank, Citibank and Wells Fargo & Co. bank are seen in this combination photo from Reuters files. REUTERS/File Photos
While the biggest risk ahead is that lower interest rates will pressure banks’ bottomlines in the coming months, the squeeze is already beginning.
JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N) both reported drops in net interest margins as they paid more for deposits. JPMorgan, the world’s biggest bank, lowered its outlook for net interest income to “about $57.5 billion” in 2019 from the $58-plus billion it estimated in February.
On Monday, Citigroup similarly reported a decline in net interest margin.
Most bank stocks fell initially in early trading on Tuesday, before some recovered.
In late morning trading, shares of JPMorgan were up 1% at $115.10; Goldman Sachs Group Inc (GS.N) – the least rate-sensitive of the three banks – climbed 1.3% to $214.37, and Wells Fargo fell 1.7% to $45.89.
“We’re not as dynamically correlated to rate changes,” Goldman Sachs Chief Financial Officer Stephen Scherr told analysts, noting the bank holds fewer deposits “than the big commercial banks.”
Trading volumes have dropped at large U.S. banks as a tit-for-tat tariff war between Beijing and Washington has kept investors on edge.
A flattening of the Treasury yield curve and rising bets for a U.S. interest rate cut have also challenged banks’ ability to boost revenues.
Investors worry that if the U.S. Federal Reserve cuts interest rates in July, it could pressure margins at banks, which have benefited recently from higher rates. JPMorgan now expects as many as three rate cuts by the Federal Reserve, Chief Financial Officer Jennifer Piepszak said.
STRONG CONSUMER BUSINESS
There was good news in the earnings reports as well. The consumer business remained buoyant, offsetting weakness in other areas. At JPMorgan Chase, average loans increased 2% on the back of an 8% rise in credit-card loans.
And even as investors have been concerned over the impact of the U.S.-China trade spat on global growth, JPMorgan Chief Executive Officer Jamie Dimon remained bullish about the economy. The bank’s performance is often considered a bellwether for the health of the U.S. economy.
“We continue to see positive momentum with the U.S. consumer – healthy confidence levels, solid job creation and rising wages – which are reflected in our Consumer & Community Banking results,” he said in a statement.
JPMorgan’s net income surged 16% here to $9.65 billion as a tax gain and higher net interest income overshadowed lower activity on its trading desks. Excluding that tax gain, it earned $2.59 per share. Net revenue rose 4% to $29.57 billion.
Analysts expected earnings of $2.51 per share and revenue of $28.90 billion, according to IBES data from Refinitiv.
The bank’s return on tangible common equity, a key profit measure for how well it uses shareholder money, rose to 20%, up from 19% in the first quarter and above the bank’s 17% target.
At Wells Fargo, meanwhile, net income applicable to common stock rose to $5.85 billihere, or $1.30 per share, in the second quarter ended June 30, from $4.79 billion, or 98 cents per share, a year earlier.
Analysts had expected a profit of $1.15 per share, according to IBES data from Refinitiv.
Wells Fargo has been leaning on cost cuts to stabilize its bottomline amid sluggish revenue in the wake of sales-practice scandals that spread to each of its primary business segments and claimed two chief executives.
Wells Fargo is also being squeezed by the changing interest-rate environment. Its net interest margin dropped 11 basis points to 2.82% in the most recent quarter. The bank reported non-interest expense of $13.4 billion, down $533 million from a year earlier, while total loans rose 0.6% to $949.88 billion.
Goldman Sachs Group Inc (GS.N)’s fixed-income business suffered another disappointing quarter with net revenues falling by 13%, impacted by interest rate products and currencies.
Despite the better-than-expected performance, revenue still fell at three of its four major businesses, with the biggest declines in trading and investment management.
Equity trading was a bright spot here for Goldman as revenue increased by 6%, its second highest quarterly performance in four years. Goldman said clients were more active than the same period a year ago.
Institutional client revenue, which includes trading, slipped 3%, while investment banking revenue was down 9%. However, revenue from the bank’s investing and lending business rose 16%, its highest quarterly performance in eight years.
Evercore ISI analyst Glenn Schorr said Goldman had delivered a “pretty good quarter” with most business lines performing “a little better than expected”.
The bank’s net earnings applicable to common shareholders fell 6% to $2.20 billion in the quarter. Earnings per share fell to $5.81 from $5.98 a year earlier. Total net revenue fell 2% to $9.46 billion.
Analysts had expected earnings of $4.89 per share on revenue of $8.83 billion, according to IBES data from Refinitiv.
Additional reporting by Sinead Carew and David Henry in New York and Sweta Singh and Noor Zainab Hussain in Bangalore; Writing by Neal Templin; Editing by Bernadette Baum