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.