JP Morgan Chase (NYSE:JPM)
Historical Stock Chart
1 Year : From May 2018 to May 2019
JPMorgan, Wells Fargo, Citi report higher profit
By Telis Demos, Peter Rudegeair and Emily Glazer
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 13, 2018).
The good times keep rolling for the biggest U.S. banks, with consumers easily absorbing higher borrowing costs and the economy shrugging off trade spats, political strife and market swoons.
JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. posted double-digit profit increases in the third-quarter, largely because of a pickup in income from consumer lending and spending.
Rising interest rates make it more expensive for households to maintain a borrowing binge that has reached record highs in some categories, yet banks reported Friday that default rates nonetheless improved in the third quarter.
Markets around the world have struggled this week to come to terms with how rising interest rates and government bond yields will ripple through the economy, as well as with the impact of the U.S.'s antagonism toward key trading partners.
Fears that higher borrowing costs could lead to a slowdown in consumer spending and business investment helped drive the Dow Jones Industrial Average down 5% over Wednesday and Thursday. President Donald Trump blamed the steep drop in markets this week on the Federal Reserve's decision to raise short-term rates: "I think the Fed has gone crazy," he said.
Yet bank executives said underlying economic trends are encouraging.
"Most of the consumer credit written since the Great Recession has been pretty damn good," JPMorgan Chief Executive James Dimon said a conference call Friday morning. He added that didn't expect the strong performance of the U.S. economy to diminish soon "in spite of these increasing overseas geopolitical issues bursting all over the place."
Executives brushed off the market's sharp move this week, which roiled their own stocks.
"The U.S. economy is performing very, very well, and the Fed has been moving steadily upward over the past two years," Citigroup Chief Financial Officer John Gerspach told reporters on a conference call on Friday. "Now, the market is going to have to react to somewhat of a return to a more normal short-term rate structure."
JPMorgan's third-quarter profit rose 24% from a year ago, to $8.4 billion, and Wells Fargo was up 32% to $6 billion. Citigroup's net income rose 12%. All three banks also continued to benefit from a tax-code overhaul that slashed the corporate rate.
JPMorgan shares were trading down 1.4% midday Friday, while Citigroup rose 0.56% and Wells Fargo was up 0.12%. Bank stocks, broadly, have underperformed this year. The Nasdaq KBW Bank index is down about 6% this year, versus a 3% rise in the broader S&P 500.
U.S. consumers, excluding their mortgages, now owe a record $4 trillion in the form of student loans, auto loans and credit cards. Despite higher debt loads, households are paying out just under 10% of their disposable income on interest payments, according to Federal Reserve data. That is down from over 13% in the run-up to the financial crisis.
Citigroup reported a 4% jump in North American credit-card borrowing, to $137 billion, even as rates charged on those loans ticked higher. Credit-card balances were up 5% to $148 billion at JPMorgan.
A trend of rising defaults for card loans over the last several quarters slowed. Citigroup reported that 2.91% of loans on the bank's branded cards were lost to defaults, higher than a year ago but below the 3.04% rate in the second quarter.
Overall default rates continued to trend lower. JPMorgan charged off 0.45% of its loan portfolio during the third quarter, down from 0.58% a year go. Wells Fargo's overall charge-off rate fell to 0.29% of its loan book.
The banks' mortgage businesses, however, have suffered as rates have risen. The pace of new mortgage lending in the third quarter dropped 16% at JPMorgan and 22% at Wells Fargo.
Mortgage rates hit their highest level in more than seven years this week, a level that some fear could cause even more consumers to think twice about buying homes.
JPMorgan shareholder Matt Watson of James Investment Research Inc. said he expects rising rates to continue to put pressure on banks' mortgage businesses.
"Rising rates is not necessarily a panacea for large banks, it's a spread between the two," said Mr. Watson, whose Alpha, Ohio, firm owns around $46 million worth of JPMorgan stock.
With the slowdown, banks are looking to cut costs in the business. The Wall Street Journal reported recently that JPMorgan is laying off around 400 employees in its mortgage division and Wells Fargo is laying off around 650 mortgage employees to help cope with a slowdown in the market. Wells Fargo CEO Timothy Sloan said on a conference call with analysts that the mortgage-banking industry is "in overcapacity right now."
"It's unclear exactly how long it's going to take that to shake out," he added.
Banks also reported rising pressure in the form of consumers and businesses pressing for higher deposit rates.
Wells Fargo said deposits fell 3% from a year ago, to $1.27 trillion, as consumers were seeking to move their extra money "to higher-rate alternatives." Citigroup, whose North American retail deposits also fell, said it faced new pressure from small- and medium-size business customers who wanted to move money elsewhere.
Consumers aren't the only borrowers in the spotlight. Companies are by some measures as extended as ever, fueled by years of historically cheap borrowing costs. As of the first quarter, U.S. corporate debt as a percentage of GDP stood at 45.2%, topping the highest point in the run up to the financial crisis, according to Moody's Corp.
But even as some onetime retailer leaders, such as Sears Holding Corp. or Toys "R" Us, have been threatened by changing consumer habits, banks didn't report any particular concerns about their exposure to highly leveraged companies.
"It's a different business [today] than it was during the crisis and precrisis," Citigroup's Mr. Gerspach told reporters on Friday.
Write to Telis Demos at firstname.lastname@example.org, Peter Rudegeair at Peter.Rudegeair@wsj.com and Emily Glazer at email@example.com
(END) Dow Jones Newswires
October 13, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.