By Peter Rudegeair and Telis Demos
Lower taxes, a boost in lending income and a flurry of trading
activity sparked by market volatility propelled profits higher at
three of the U.S.'s biggest banks in the first quarter.
JPMorgan Chase & Co. led the charge, reporting net income of
$8.7 billion -- up 35% from a year earlier and a record for the
largest U.S. bank by assets. While the performance benefited from a
quarter-billion dollars in savings from a lower tax rate, Chief
Executive James Dimon said the results also reflected a brightening
economic and business environment.
"The global economy continues to do well, and we remain
optimistic about the positive impact of tax reform in the U.S. as
business sentiment remains upbeat, and consumers benefit from job
and wage growth," he said in the bank's earnings release.
Despite the strong earnings, investors sent shares lower on
signs of tepid loan growth, particularly from businesses, and a
lack of new earnings drivers after a run-up in valuations.
The brighter economic conditions also helped Citigroup Inc. It
reported that net income rose 13% from a year earlier to $4.62
billion, while its return on equity, a closely watched measure of
bank profitability, was at its highest level in five years.
Wells Fargo & Co. said its first-quarter profit rose 5% to
$5.9 billion, although it cautioned that it might need to restate
those results because of a looming regulatory settlement that could
be as high as $1 billion.
PNC Financial Services Group Inc., the nation's eighth-largest
bank by assets, reported a 16% rise in earnings thanks to rising
interest rates and commercial-lending growth.
While the banks largely met, or in some cases exceeded
expectations, shares of JPMorgan fell more than 2% and Wells Fargo
was down by more than 3%.
Bank stocks have outperformed the broader market since the
November 2016 presidential election. Now, investors are looking for
reasons for them to rise further, something that was lacking in the
most-recent results.
"Bank stocks are at a point now where valuations are similar to
2007," said James Shanahan, senior equity research analyst at
retail brokerage Edward Jones. "It feels like there needs to be a
really strong catalyst to propel them higher from here."
Investors, for instance, are anticipating an acceleration in
industry loan growth as the year progresses, said Jason Benowitz,
senior portfolio manager at Roosevelt Investment Group Inc. and an
investor in JPMorgan. "But this was not the tone" on bank earnings
calls, he added.
Loan volume, especially for businesses, was on the rise at
JPMorgan, Citigroup and PNC. But growth remained below levels of a
few years ago. Bank executives said the tax overhaul passed late
last year hasn't yet had a pronounced effect on companies'
willingness to borrow.
"I think we have to recognize that tax reform is in its early
stages," Marianne Lake, JPMorgan's finance chief, said on a call
with reporters.
PNC CEO William Demchak said the lower tax rate may also crimp
some areas of commercial lending. Companies will have more money on
hand, which could reduce their need for bank loans, he added in an
interview.
For the banks themselves, the tax overhaul is already flowing
through to their bottom lines. JPMorgan reported an effective tax
rate of 18% in the first quarter, down from 23% a year earlier.
Citigroup's effective tax rate fell to 24% from 31%, and Wells
Fargo's dropped to 19% from 27%.
The lower taxes helped boost banks' return on equity. At
JPMorgan, this measure of profitability hit 15% in the quarter, its
highest level in years. Citigroup's return of 9.7% was within
striking distance of 10%, a psychologically important level for
investors.
The gauge of profitability also was bolstered by banks'
continued return of capital to investors. JPMorgan said it returned
$6.7 billion during the quarter through share buybacks and dividend
payments. Combined, it, Citi and Wells Fargo have returned nearly
$60 billion to investors over the past four quarters.
Besides the boost from taxes, banks' businesses mostly remained
solid, even if growth isn't spectacular.
Rising interest rates have helped bolster net interest margins,
which measure how profitably banks put depositors' money into loans
and securities. They expanded at JPMorgan and Citigroup, reversing
years of declines.
Yet analysts expect banks will soon have to pay more for
deposits to keep customers from shifting funds elsewhere,
especially if the Federal Reserve continues to increase rates. That
could pressure those margins.
The prospect of sharply higher interest rates also sparked
market gyrations during the first quarter. The ensuing volatility
in stock markets was a boon for bank trading desks.
Equities-trading revenue rose 38% to $1.1 billion at Citigroup, the
best in seven years, and 26% to a record $2 billion at
JPMorgan.
In bond markets, however, volatility kept money managers on the
sidelines. JPMorgan's revenue for that unit was flat, excluding
accounting adjustments, while Citigroup's was down 7% versus a year
earlier.
Market upheaval also depressed investment-banking activity as
companies were spooked by the prospect of issuing additional bonds
in choppy markets. Debt-underwriting fees fell 18% at JPMorgan and
8% at Citigroup. "Significant volatility isn't helpful," Citigroup
CFO John Gerspach said on a conference call with reporters.
While markets were unsettled during the quarter, the political
atmosphere was particularly tumultuous. Citigroup said, though,
that things like the threat of a U.S.-China trade war hadn't so far
crimped global activity. Rather, the bank has experienced higher
revenue in both consumer and corporate banking, especially in Asia
and Latin America.
"The volatility we see from morning tweets, or stances that vary
from time to time -- I won't say the world is numb or numbing to
that, but the positive things happening are overwhelming that," CEO
Michael Corbat told analysts.
--Christina Rexrode contributed to this article.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and Telis
Demos at telis.demos@wsj.com
(END) Dow Jones Newswires
April 13, 2018 19:25 ET (23:25 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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