WFC Wells Fargo and Company

By Peter Rudegeair and Emily Glazer 

The honeymoon period for big banks when it comes to higher interest rates is stretching out longer and longer.

The Federal Reserve's decision to raise its benchmark short-term rate four times in 2018 helped lift revenue at JPMorgan Chase & Co. and Wells Fargo & Co. during the last three months of the year. The cost to borrow on credit cards and other types of loans without fixed interest rates is tied to the Fed actions, allowing banks to pocket higher interest payments on those loans.

The higher rates have yet to sting banks' bottom lines. They have been able to hold off on raising rates too much on deposits to prevent customers from seeking better returns elsewhere.

Markets have been on edge in recent weeks after investors revised their outlook around global economic growth, the pace of future Fed rate increases and the effect of the partial U.S. government shutdown on the economy. That change in sentiment has weighed on bank stocks: over the past three months, the KBW Nasdaq Bank Index is down about 8%, more than the decline in the S&P 500 index in that same span.

But bank executives said on Tuesday that despite the market turbulence, underlying business performance and economic trends remain favorable.

"There's nothing we see in the data... that suggests the economy is rolling over or a recession is imminent," said Jason Ware, chief investment officer of Albion Financial Group, which owns around 137,000 shares in JPMorgan. "That's underpinned by a healthy consumer, still-low interest rates, rising confidence and a healthy jobs market."

Net interest income at JPMorgan, the amount it earns from loans and securities minus the amount it pays to depositors and creditors, rose 10% in the fourth quarter to $14.4 billion. That helped push overall net income up by two-thirds to $7.07 billion. Wells Fargo enjoyed a 3% boost to net interest income, but profit fell 1.4% to $6.06 billion due to weak consumer results, especially in its all-important mortgage business.

Improved lending revenues helped offset an end-of-year slowdown in banks' trading businesses, where bouts of volatility prompted many Wall Street clients to step back from the markets and sapped one of banks' biggest sources of fees. A tepid period of new bond issuance helped keep investment-banking fees stagnant from a year earlier.

Banks' consumer units were the biggest beneficiaries of higher lending income. JPMorgan profit in that unit was $4.03 billion in the fourth quarter, up 53% from $2.63 billion in the year-earlier period, driven largely by better margins and an increase in credit-card balances. At Citigroup Inc., which reported earnings on Monday, net interest revenue from the bank's U.S. branded-card business rose 6% from a year ago to $2 billion in the fourth quarter.

Meanwhile, the rates banks paid out on deposits, while rising, lagged behind the uptick in loan yields. At JPMorgan, the average interest rate on its loan book in the fourth quarter rose 0.59 percentage points to 5.26% while the average rate on its interest-bearing deposits increased 0.37 percentage points to 0.72%.

There was weakness in mortgage lending, where rate increases are felt most acutely as borrowers refrain from refinancing their home loans when interest costs rise. JPMorgan said that mortgage volume fell 30% in the fourth quarter, which contributed to mortgage revenue declining 8% in $1.32 billion. Wells Fargo's mortgage volume fell by a similar percentage in the fourth quarter after refinancing activity fell by more than 50%.

Smaller banks also reported similar results. Shares of First Republic Bank were on track to climb by the largest percentage increase on record, according to Dow Jones Market Data, after the bank reported earnings and net interest income that beat analysts' estimates. The bank also reported a net interest margin, which measures how profitably it can lend out depositors' funds, that was higher than its own expected range.

A number of factors could alter the trajectory for the U.S. economy and interest rates. Investors are betting that there is a high chance that the Fed either keeps rates stagnant or cuts them by the end of the year. And JPMorgan CEO James Dimon said on a conference call with reporters that if the government shutdown lasted through the first three months of 2019, that could send U.S. economic growth to zero.

Mr. Dimon urged analysts to look at the underlying reasons behind any interest-rate move to determine how it would affect big banks.

"The why is equally if not more important than the what," said Mr. Dimon. "If it is a pause because you are going to go to recession [and] you're going to reduced rates, that obviously is very different than it's a pause, economy strong and they raise rates."

--Telis Demos and Allison Prang contributed to this article.

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

January 15, 2019 15:24 ET (20:24 GMT)

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