Banks post big profits, but lower interest rates worry
NEW YORK — So far, it appears 2019 was another record year for Wall Street.
Trading of stocks and bonds rebounded after a terrible end to 2018 and consumers spent tons of money on their credit cards, buoyed by a strong job market and steady economic growth. On Tuesday, JPMorgan Chase reported a record annual profit, while Citigroup posted its best results since before the Great Recession.
“Given record-high equity prices, very low unemployment, a growing economy at about 2%, a stable U.S. dollar, and positive developments in trade, it is not surprising to see the results that are coming in,” said Mark Doctoroff, global co-head of the Financial Institutions Group at MUFG.
The biggest concern going forward is that lower interest rates will slow down Wall Street’s decadelong profit party. The Federal Reserve cut interest rates three times in 2019, each time by a quarter of a percentage point. That’s started to cut into bank’s interest income — the difference between what a bank charges for loans and what it pays out on deposits — which has been a major profit driver in the last couple of years.
The improved results at JPMorgan and Citigroup were partly attributed to a surge in trading revenue. In late 2018, plunging stock markets and fears of a possible recession weighed on bank profits in the final quarter.
In 2019, the Fed’s rate cuts and a phase one “Phase 1” trade agreement between China and the U.S. helped alleviate recession fears. Revenue from trading jumped 55% at JPMorgan and 49% at Citi in last year’s fourth quarter.
The banks’ other businesses did well, but lower interest rates were a hurdle. JPMorgan Chase’s net interest revenue fell 2% while the same metric at Citigroup fell 1%.
Wells Fargo also reported quarterly earnings Tuesday. Its results are messy due the bank’s seemingly unending legal troubles and it being restrained from growing its business by the Federal Reserve. It took a $1.5 billion charge last quarter to cover its legal costs and is on its fourth CEO in less than four years. Charles Scharf, who previously ran Visa Inc. and BNY Mellon, said Wells Fargo still had not “effectively addressed” the cultural problems that caused the bank’s legal issues in the first place.
Even setting aside the legal issues, things do not look good for Wells Fargo, which is more susceptible to fluctuations in interest rates because of its large consumer banking business. It saw interest revenue fall 8%.
Bank executives say that the U.S. economy is healthy and growing steadily, and the American consumer is spending and borrowing with confidence, which should keep bank profits healthy in 2020.
“Wages are up, cash flow is up, investments are up. We don’t see anything that’s concerning,” said JPMorgan Chief Executive Jamie Dimon in a conference call with reporters.
The biggest challenge could be lower interest rates, as the Fed has signaled it intends to keep rates steady for the foreseeable future.