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Higher interest rates boost US bank earnings
NEW YORK, Oct 13, 2018 (BSS/AFP) – A solid US economy and rising interest
rates boosted the profits of large US banks, according to earnings reports on
Friday, despite President Donald Trump’s antagonism to rate hikes by the
central bank.
The results from JPMorgan Chase, Citigroup and Wells Fargo followed a two-
day stock market rout that Trump blamed on the Federal Reserve in his
attacks.
The stock losses were sparked in part by a sudden rise in 10-year US
Treasury bond yields, which raised fears that higher interest rates would
dent economic growth.
But the trio of bank results helped Wall Street stage a rally on Friday to
win back some of the losses over the last 48 hours.
The broad-based S&P 500 finished up 1.4 percent to 2,767.13, after having
declined by more than five percent over the prior two days.
“Certainly the US economy is performing very, very well,” said Citigroup
Chief Financial Officer John Gerspach.
He said the jump in Treasury yields is not surprising as the US and other
major economies exit a period of extraordinarily low interest rates after the
2008 financial crisis.
“All you’re seeing now is the market trying to find the right level for
the 10-year rate,” Gerspach said.
JPMorgan Chief Executive Jamie Dimon also offered an upbeat assessment.
“The economy is still very strong…despite these overseas geopolitical
issues bursting all over the place,” he told reporters.
And the Fed’s decisions to increase interest rates were welcome when they
are in response to strong growth, as is currently the case, he said.
Big banks have seen a big drop in mortgage refinancings due to higher
interest but have yet to see some other unwelcome events that usually
accompany higher rates, such as a big jump in customer defaults on credit
cards.
But Dimon expressed concern about an ongoing trade fight between the US
and China, which he listed among a series of “increasing economic and
geopolitical uncertainties” that could dent the economy.
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Other worries include Brexit, unwinding massive central bank bond-buying
programs and geopolitical concerns from Italy and Saudi Arabia.
Shares of JPMorgan finished 1.1 percent lower at $106.95. Citigroup gained
2.1 percent to $690.84, while Wells Fargo won 1.3 percent to $52.11.
CFRA Research analyst Kenneth Leon said the market’s mixed reaction to the
reports reflects unease over the prospects of higher interest rates and
“whether or not that will slow down the US economy.”
– Profits jump –
JPMorgan, the biggest US bank by assets, reported third-quarter profit of
$8.4 billion, 24.5 percent jump from the year-ago period. Revenues increased
5.2 percent to $27.8 billion.
Citigroup reported an 11.8 percent rise in profits to $4.6 billion, even
as revenues dipped 0.2 percent to $18.4 billion.
Wells Fargo reported third-quarter profit of $6.0 billion, a gain of 32.2
percent from the year-ago period. But revenues inched up to $21.9 billion
from $21.8 billion in the year-ago period.
Banks typically see higher profits when interest rates go up because they
are able to charge more for loans. While this benefit can be blunted somewhat
because of higher payouts for deposits, analysts generally view the positives
of higher rates as offsetting the negatives.
All three banks reported increases in net interest income, and JPMorgan
and Citigroup scored gains in overall loans compared with the year-ago
period.
Wells Fargo’s total loans fell compared with the year-ago period, although
commercial loans were slightly higher.
Unlike the other two banks, deposits also fell at Wells Fargo, suggesting
it has not completely shaken the effects of a fake accounts scandal in 2016.
Wells Fargo has revamped its employee incentive systems and replaced
executives following the scandal.
Chief Financial Officer John Shrewsberry pointed to some positive business
trends, including growth in primary consumer checking customers and increased
debt and credit card usage.
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