Bank prof­its grow but credit qual­ity a con­cern


Growth in credit card lend­ing and a tight rein on costs boosted third-quar­ter prof­its at JPMor­gan Chase and Cit­i­group, off­set­ting down­beat trad­ing re­sults and a chal­leng­ing in­ter­est-rate en­vi­ron­ment.

The re­sults pointed to early signs of a po­ten­tial de­te­ri­o­ra­tion in con­sumer-credit qual­ity, which could be a con­cern for a host of lenders and credit card is­suers.

The re­sults from JPMor­gan and Cit­i­group, the top two US banks by as­sets, showed mod­est rises in rev­enue. But the fo­cus on costs led net in­come to rise 7.1 per cent at JPMor­gan to $US6.73 bil­lion ($8.59bn) and 7.6 per cent to $US4.13bn at Cit­i­group.

“We tightly man­aged our ex­penses and again saw loan and de­posit growth in both our con­sumer and in­sti­tu­tional busi­nesses,” Cit­i­group chief ex­ec­u­tive Michael Cor­bat told an­a­lysts.

Cit­i­group’s ef­fi­ciency ra­tio, or ex­penses as a per­cent­age of rev­enue, im­proved to 56 per cent for the quar­ter, bet­ter than the bank’s tar­get of 58 per cent for the year. JPMor­gan’s fell to 55 per cent from 57 per cent a year ear­lier.

Both firms man­aged to beat Wall Street ex­pec­ta­tions for both rev­enue and earn­ings per share. Their stocks fell, though, as the re­sults gave in­vestors few rea­sons to think shares could build on heady gains ex­pe­ri­enced in the wake of last year’s pres­i­den­tial elec­tion.

Since Don­ald Trump’s vic­tory, Cit­i­group’s stock has ad­vanced nearly 50 per cent and JPMor­gan shares are up nearly 40 per cent. Both have out­paced the broader stock mar­ket and the KBW Nas­daq Bank in­dex.

The gains re­flected in­vestor ex­pec­ta­tions for stronger eco­nomic growth, higher in­ter­est rates and looser reg­u­la­tions. But many of those hopes, such as for tax re­form that would boost banks’ prof­its, have yet to ma­te­ri­alise.

On the in­ter­est-rate front, the ex­pe­ri­ence so far this year has been mixed. Rates have moved higher as the Fed­eral Re­serve has lifted its short-term bench­mark, but longer-term yields have not risen as far.

That puts pres­sure on banks’ net-in­ter­est mar­gins, or the dif­fer­ence in what they earn by bor­row­ing and lend­ing money. Th­ese mar­gins de­clined at Cit­i­group from a year ago, while they rose slightly at JPMor­gan. The mar­gins re­main his­tor­i­cally low at both banks.

While net in­come grew at both banks, re­turn on eq­uity, a key mea­sure of prof­itabil­ity, re­mained rel­a­tively sub­dued. JPMor­gan’s re­turn for the third quar­ter was 11 per cent. That is slightly above the bank’s the­o­ret­i­cal cost of cap­i­tal of 10 per cent.

Cit­i­group, mean­while, posted a re­turn of just 7.3 per cent. Although this is up from 6.8 per cent in the prior quar­ter and a year ear­lier, it is still well be­low the 10 per cent level. Cit­i­group for years hasn’t posted a re­turn that con­sis­tently cleared that hur­dle.

Both banks found bright spots with con­sumers.

Cit­i­group said it saw a 12 per cent rise in rev­enue in its core North Amer­i­can re­tail-bank­ing unit to $US1.2bn, in part as more cus­tomers used its wealth­man­age­ment ser­vices. It also saw a 6 per cent jump in credit card lend­ing glob­ally.

“We would rate the health of the con­sumer right now as pretty good,” Mr Cor­bat said.

“The com­bi­na­tion of jobs, a lit­tle bit of wage growth, sta­ble hous­ing, and ris­ing as­set prices has left the con­sumer in a pretty good place.”

JPMor­gan also saw growth in its con­sumer unit, in­clud­ing an 8 per cent rise in US in­ter­est­bear­ing de­posits.

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