U.S. banks en­joy perks of a grow­ing econ­omy

The Globe and Mail Metro (Ontario Edition) - - REPORT ON BUSINESS - DAVID HENRY I MANI MOISE

The U.S. bank­ing in­dus­try is en­joy­ing the ben­e­fits of a grow­ing econ­omy and lower taxes, and three of the largest lenders re­ported dou­ble-digit profit growth on Fri­day.

The results re­flected an ar­ray of pos­i­tive busi­ness fac­tors for banks. Their net in­ter­est mar­gins – the dif­fer­ence be­tween what they pay on de­posits and what they charge on loans – have widened. Other key busi­nesses, such as manag­ing cus­tomers’ wealth or pro­vid­ing trea­sury ser­vices for cor­po­ra­tions, are gen­er­at­ing con­sis­tent fees that pad the bot­tom line. Banks also are get­ting a lift from cost-cut­ting pro­grams they im­ple­mented af­ter the 2007-09 fi­nan­cial cri­sis, as well as tax cuts signed into law by U.S. Pres­i­dent Don­ald Trump last year. Com­bined, those fac­tors are sav­ing the in­dus­try bil­lions of dol­lars each quar­ter.

“Wages are go­ing up. Par­tic­i­pa­tion is go­ing up. Credit that’s been writ­ten is pris­tine. Hous­ing is in short sup­ply. Con­fi­dence – both small busi­ness, con­sumers – is ex­traor­di­nar­ily high, and that could drive a lot of growth for a while de­spite some of the head­winds out there,” JP­Mor­gan Chase & Co. chief ex­ec­u­tive Jamie Di­mon told an­a­lysts on a con­fer­ence call.

While the ris­ing eco­nomic tide is lift­ing all bank­ing boats, some are ben­e­fit­ing more than oth­ers.

JP­Mor­gan, the big­gest U.S. bank, said its third-quar­ter profit jumped nearly 25 per cent, with each of its four busi­ness units gen­er­at­ing higher rev­enue.

Cit­i­group Inc., the No. 3 U.S. bank by as­sets, re­ported a 12-per-cent rise in profit, driven mostly by lower taxes and cost sav­ings.

Wells Fargo & Co., the fourth-largest in the sec­tor, re­ported a 32-per-cent gain in profit. The bank cited strong de­mand for auto, small busi­ness and per­sonal loans, as well as cost cut­ting.

Al­though busi­ness con­di­tions are gen­er­ally good for the bank­ing in­dus­try, results were not uni­formly im­pres­sive to an­a­lysts and in­vestors.

Wells Fargo is still strug­gling with the ef­fects of a widerang­ing sales scan­dal that erupted more than two years ago, and its mort­gage busi­ness is suf­fer­ing from a sharp down­turn in re­fi­nanc­ing. Even as it re­ported a big jump in prof­its, its earn­ings per share missed es­ti­mates by a penny.

JP­Mor­gan’s bond trad­ing busi­ness had a 10-per-cent fall in rev­enue com­pared with the year-ago pe­riod. The busi­ness has faced chal­lenges across Wall Street for sev­eral years due to new reg­u­la­tions and changes in cus­tomer pref­er­ences. JP­Mor­gan’s fi­nance chief, Mar­i­anne Lake, said in­creased com­pe­ti­tion has made it harder to hold onto mar­ket share at a time when mar­gins are thin­ning out.

Mr. Di­mon dis­cussed sev­eral con­cerns that could dent the in­dus­try’s prof­itabil­ity. Geopo­lit­i­cal ten­sions, Brexit and in­fla­tion are real threats, he said.

Mr. Di­mon said short-term rates could go up to 4 per cent as cen­tral bankers try to pre­vent higher in­fla­tion, and he is not sure Wall Street is ready. This week, the Dow Jones In­dus­trial Av­er­age fell 800 points, with an­a­lysts cit­ing con­cerns about U.S. Fed­eral Re­serve pol­icy.

“The mar­ket may not take it that well if rates go up,” Mr. Di­mon said.

While the ris­ing eco­nomic tide is lift­ing all bank­ing boats, some are ben­e­fit­ing more than oth­ers.

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