Banks enjoy strong earnings, but rate cut could be spoiler

While the US’ biggest banks are reporting solid earnings this week, the sector could face some difficulty if the Federal Reserve cuts interest rates later this month as expected.

Wells Fargo, the fourth-largest US bank by assets, posted a profit of $6.21 billion in the second quarter, compared with $5.19 billion for the same period a year ago.

Citigroup, the nation’s third-largest bank, reported quarterly profit of $4.8 billion, up from $4.5 billion a year ago.

JP Morgan Chase, the nation’s largest bank by assets, reported second-quarter earnings of $9.65 billion compared with $8.32 billion a year ago. The banks beat Wall Street earnings estimates.

The Dow Jones Industrial Average hit a new intraday high of 27,398.68 on Tuesday on the bank earnings, but finished lower by 23.53 points, or 0.09 percent, to 27,335.63. The S&P 500 lost 10.26 points, and the Nasdaq Composite dropped 35.39 points.

The declines came after President Donald Trump said the US and China have a “long way to go” on trade, adding that the US can slap tariffs on an additional $325 billion worth of Chinese goods “if we want’’.

The Commerce Department reported that personal income and disposable income rose in May, the most recent month surveyed by statisticians, while personal consumption expenditures rose to $59.7 billion, an increase of 0.4 percent from the previous month.

Higher bank earnings and increased consumer spending suggest there is no immediate threat of a recession despite the economic dislocations in the retail and farming sectors created by the ongoing US-China trade dispute.

But the Fed cutting its current rate of 2.25-2.50 percent by a quarter-point will cost banks hundreds of millions of dollars in lower interest-payment revenue. The Fed has been raising rates since late 2015, and that boosted bank profitability as loans became more costly.

“The (bank) earnings looked fine, topping estimates,” Kamal Khan, chief US editor at Investing.com in New York, told China Daily. “Yet the financial stocks are down. Longterm investors will still be happy, but the momentum money is concerned that next week’s expected rate cut is the start of a progressive easing pattern by the Fed.”

The conventional wisdom is that consumer spending will sustain growth in the US economy, despite slowing economies in Asia and Europe, as evidenced by the strong performance of major banks in the second quarter.

The Federal Reserve Bank of Atlanta said the economy grew at an annual rate of 1.3 percent in the second quarter ended June 30 after growing at a 3.1 percent annual rate in the first quarter. Trump has badgered the Federal Reserve to cut interest rates to stimulate the economy despite strong job growth and rising income.

In a conference call to discuss Citigroup’s earnings, CFO Mark Mason said each quarter-point the Fed cuts interest rates will cost the bank about $50 million per quarter in lower interest payments from loans.

Citigroup said business lending in Asia hasn’t increased for the last three quarters and declined 7 percent in the second quarter from the same period a year ago.

Goldman Sachs said in a research note to investors that Citigroup’s “risks include slower rise in rates (or) rate cuts, slow economic growth, higher credit card losses, international business underperformance”.

The Federal Reserve next meets July 30-31.