Banks’ re­sults re­as­sure Wall St.

With solid earn­ings from Wells Fargo, JP­Mor­gan Chase and Cit­i­group, stocks re­cover some­what.

Los Angeles Times - - BUSINESS - By James Ru­fus Koren

Three ma­jor banks re­ported solid earn­ings Fri­day, help­ing ease wor­ries on Wall Street and send­ing stocks up­ward — if only slightly — af­ter a two-day sell-off.

Wells Fargo & Co., JP­Mor­gan Chase & Co. and Cit­i­group each posted dou­ble-digit per­cent­age gains in profit, boosted by higher in­ter­est rates and lower fed­eral taxes un­der the GOPbacked tax cuts ap­proved last year.

The higher prof­its, cou­pled with bank ex­ec­u­tives’ rosy eco­nomic out­look, were wel­come news for in­vestors, who were watch­ing the re­sults closely for signs about the health of the U.S. econ­omy amid a week of stock mar­ket tur­bu­lence lead­ing up to this quar­ter’s earn­ings sea­son.

“Again, the econ­omy is strong. The econ­omy could be strong for a while,” JP­Mor­gan Chief Ex­ec­u­tive Jamie Di­mon said on a con­fer­ence call Fri­day morn­ing. “Wages are go­ing up, par­tic­i­pa­tion is go­ing up, credit is pris­tine, hous­ing is in short sup­ply. … That could drive a lot of growth for a while.”

JP­Mor­gan and Citi both re­ported re­sults that topped Wall Street es­ti­mates. Wells Fargo re­ported mixed earn­ings, with bet­ter-than-ex­pected rev­enue but profit that fell short of an­a­lysts’ ex­pec­ta­tions. The over­all pos­i­tive earn­ings helped push the bench­mark S&P 500 in­dex up by more than 1% by the close of trad­ing.

Ken Leon, a bank eq­uity an­a­lyst at re­search firm CFRA, said re­sults over­all were “ho-hum,” but that banks re­ported no ma­jor prob­lems and showed that Amer­i­can con­sumers ap­pear to be do­ing well, tak­ing out loans and spend­ing on credit cards but not tak­ing out dan­ger­ous amounts of debt.

“Con­sumer ac­tiv­ity looks very good,” Leon said. “This prob­a­bly sets up for a strong fourth quar­ter.”

Wells Fargo re­ported third-quar­ter rev­enue of

$21.9 bil­lion, top­ping an­a­lysts’ pre­dic­tion of $21.8 bil­lion, which was in line with last year’s third quar­ter. But the bank’s earn­ings per share of $1.13, a marked im­prove­ment over the same quar­ter last year, didn’t meet ex­pec­ta­tions. An­a­lysts sur­veyed by data provider Fac­tSet had ex­pected earn­ings of $1.19 a share.

The bank re­ported a mixed bag in its lend­ing busi­ness, with to­tal loans shrink­ing com­pared with both the pre­vi­ous quar­ter and last year’s third quar­ter. It saw a $2.8-bil­lion de­cline in com­mer­cial real es­tate loans and con­tin­ued to shrink its sub­prime au­toloan busi­ness, though other types of busi­ness loans and credit card lend­ing rose. De­spite the over­all de­cline in loans, the bank earned marginally more in­ter­est in­come thanks to higher in­ter­est rates, which are on the rise.

Af­ter leav­ing its bench­mark in­ter­est rate near zero for years fol­low­ing the re­ces­sion, the Fed­eral Re­serve has steadily in­creased rates since 2015. This year, the Fed has hiked rates three times — tak­ing the fed funds rate to a range of 2% to 2.25% — and of­fi­cials have sug­gested that they may raise rates once more be­fore Jan­uary to head off in­fla­tion.

This week’s mar­ket tu­mult was trig­gered in part by in­vestors’ con­cerns that higher bor­row­ing costs for cor­po­ra­tions and con­sumers could damp eco­nomic growth. Pres­i­dent Trump went so far as to say the Fed, led by his ap­pointee Jerome Pow­ell, is “out of con­trol” and “go­ing loco.”

On a con­fer­ence call Fri­day, Wells Fargo Chief Ex­ec­u­tive Tim Sloan did not ref­er­ence the con­tro­versy but said that the bank’s loan growth was weaker than might be ex­pected in part be­cause there was lit­tle need for more cap­i­tal by cor­po­rate clients.

“Their bal­ance sheets are strong,” he said. “So I think the fact that we’ve got very buoy­ant cap­i­tal mar­kets, very liq­uid cap­i­tal mar­kets, and we have high credit qual­ity for our cus­tomers means that loan growth is a lit­tle bit slower than we would have all imag­ined in an eco­nomic growth level that we’re see­ing right now.”

The bank’s prof­its — which to­taled $6 bil­lion, up 32% over last year’s thirdquar­ter fig­ure — were boosted by cost cut­ting and lower cor­po­rate taxes. Wells Fargo shut­tered 88 branches in the third quar­ter alone and has closed or sold more than 250 over the last year.

The bank, which con­tin­ues to deal with the fall­out from a series of scan­dals stem­ming from con­sumer abuses, is op­er­at­ing un­der an as­set cap man­dated this year by the Fed­eral Re­serve. Sloan said Fri­day that he ex­pects the bank to con­tinue op­er­at­ing into next year un­der the cap, which lim­its the bank’s growth while it im­proves its cor­po­rate gov­er­nance.

JP­Mor­gan, the na­tion’s largest bank by as­sets, re­ported earn­ings of $8.38 bil­lion, or $2.34 per share, for the quar­ter, both ahead of an­a­lysts’ ex­pec­ta­tions, ac­cord­ing to Fac­tSet.

The bank re­ported solid rev­enue growth from many of its lend­ing busi­nesses, in­clud­ing con­sumer and small-busi­ness bank­ing, credit cards and com­mer­cial bank­ing, driven by higher in­ter­est rates. Mort­gage bank­ing was one ex­cep­tion, with higher in­ter­est rates ac­count­ing for markedly fewer new loans and lower rev­enue there.

Over­all, the bank’s loan port­fo­lio ticked up 1% com­pared with that of this year’s sec­ond quar­ter and 4% com­pared with that of last year’s third quar­ter.

Be­cause of higher in­ter­est rates, the bank’s in­ter­est in­come climbed 9% com­pared with the year-ago quar­ter, con­tribut­ing to an over­all in­crease in profit of 24%.

While not specif­i­cally men­tion­ing the U.S.-China trade war — an­other un­cer­tainty that has con­trib­uted to the stock mar­ket’s re­cent volatil­ity — Di­mon cau­tioned that there may be trou­ble ahead for the econ­omy de­spite its cur­rent strong per­for­mance.

“The U.S. and the global econ­omy con­tinue to show strength, de­spite in­creas­ing eco­nomic and geopo­lit­i­cal un­cer­tain­ties, which at some point in the fu­ture may have neg­a­tive ef­fects on the econ­omy,” he said in Fri­day’s earn­ings an­nounce­ment.

Cit­i­group, which also re­leased re­sults Fri­day, re­ported bet­ter-than-ex­pected earn­ings for the quar­ter. The bank re­ported earn­ings of $1.73 a share, beat­ing an­a­lysts’ ex­pec­ta­tions of $1.68. Rev­enue of $18.4 bil­lion was in line with ex­pec­ta­tions. The bank’s loan port­fo­lio grew, up 1% over the pre­vi­ous quar­ter and 3% over that of last year’s third quar­ter, with in­ter­est in­come also higher.

Citi gained 2.1% on the day at $69.84, Wells Fargo gained 1.3% at $52.11, and Chase gave back its early gains to lose 1% at $106.95.

Spencer Platt Getty Im­ages

WELLS FARGO re­ported third-quar­ter rev­enue of $21.9 bil­lion, top­ping an­a­lysts’ pre­dic­tion of $21.8 bil­lion.

Mario Tama Getty Im­ages

CIT­I­GROUP also re­ported earn­ings Fri­day. Its rev­enue of $18.4 bil­lion was in line with ex­pec­ta­tions.

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