By Emily Glazer and Christina Rexrode
Loan growth helped JPMorgan Chase & Co. and Citigroup Inc.
post double-digit profit increases in the second quarter,
reflecting solid economic fundamentals in the U.S. and abroad.
JPMorgan Chief James Dimon laid out the case for why the economy
is doing well, bolstering banks. "People are going back to the
workforce; the consumer balance sheet is in good shape; capital
expenditures are going up; household formation is going up;
home-building is in short supply," he said. "If you're looking for
potholes out there, there are not a lot of things."
Trade and tariff disputes hadn't put a damper on results,
either. Executives at both banks, whose businesses span the globe,
said that while customers were worried, trade concerns so far were
impacting psyches more than spending and investment decisions.
"It's created some uncertainty," Citigroup finance chief John
Gerspach said. "But from an overall business point of view we
haven't seen that impact as of yet."
Even so, the performance of the two banks wasn't enough to sway
markets. After ramping up bank shares in the wake of Donald Trump's
election, investors have grown more wary about big banks this year
due to a stall in long-term interest rates that can weigh on bank
profits and that many view as signaling greater odds of a future
recession.
Added weights for bank shares: a growing divergence in the
economic performance of the U.S. and the rest of the world, along
with the prospect trade disputes escalate.
And while JPMorgan and Citigroup beat estimates, Wells Fargo
& Co. stumbled. The bank had a number of one-time charges that
dinged earnings, but also reported a shrinking loan book and lower
fees in several of its main businesses.
JPMorgan's stock fell slightly during the day, while shares of
Citigroup and Wells Fargo each fell more than 1%.
Gary Bradshaw, a portfolio manager at Dallas-based investment
firm Hodges Capital Management, said the results from JPMorgan and
Citigroup looked solid but concerns about profit margins might have
weighed on their stocks. Hodges owns about $950,000 of Citigroup
shares and about $600,000 of JPMorgan stock in its blue chip equity
income fund, Mr. Bradshaw said.
JPMorgan reported profit of $8.3 billion, up 18% from a year
earlier, and earnings of $2.29 a share, topping expectations of
$2.22 among analysts polled by Thomson Reuters. Citigroup's profit
rose 16% to $4.5 billion from a year ago, a result that also topped
forecasts. Earnings per share of $1.63 beat analyst estimates of
$1.56.
Income at both banks continued to benefit from last year's
tax-law changes that slashed the corporate rate. JPMorgan's
effective tax rate fell to 21% from 28% a year ago, Citigroup's
rate of 24% was down from 32%.
The banks' results were buoyed, in part, by loan growth, which
is a major factor in profitability. Business lending in particular
has begun ticking up after a decline that began in 2016.
At Citigroup, total loans rose 4%, driven by an increase in
corporate loans. Total loans also rose 4% at JPMorgan, where
Finance Chief Marianne Lake said it was fueled by busy capital
markets, especially in mergers and acquisitions.
JPMorgan showed strength in several other areas. Its trading
revenue, for example, increased 13% to $5.4 billion from $4.8
billion a year earlier. Fixed- income revenue rose 7% to $3.45
billion. Excluding the impact of U.S. tax reform, the bank said its
trading revenue would have risen 16% and fixed income would have
risen 12%.
Return on equity, a measure of profitability, was 14% in the
second quarter compared with 12% a year ago. Its returns in 2018
have been meaningfully higher than in previous years thanks to the
benefits of the tax-code overhaul.
One weak area: home lending. JPMorgan extended $21.5 billion in
mortgages in the quarter, a decrease of 10% from the $23.9 billion
the bank extended in the second quarter a year ago. Revenue in its
mortgage division, one of the largest in the U.S. by volume, was
$1.35 billion, down 6% from the $1.43 billion it reported in the
year-earlier period.
Wells Fargo, which is one of the biggest players in the mortgage
market along with JPMorgan, saw a similar decline. Its mortgage
business earned $770 million in the second quarter, down a third
from a year earlier.
Citigroup's results were more mixed than JPMorgan's.
Second-quarter trading revenue fell about 1% from a year ago, to
$3.94 billion, driven by a 6% decline in fixed-income trading.
Citigroup's return on equity improved to 9.2%, from 6.8% a year
ago. But that is still below the bank's theoretical cost of capital
of about 10%.
Lackluster returns at Citigroup are one reason its stock has
struggled this year, losing about 8%. Another issue is that
Citigroup is viewed by many investors as being among the most
internationally oriented of U.S. banks and has a large operation in
Mexico. This quarter, however, profit and revenue were up in
Citigroup's consumer bank in Mexico.
Some investors fear that this means Citigroup could be
particularly exposed if trade disputes led to a meaningful downturn
in cross-border activity, or if negotiations over the North
American Free Trade Agreement broke down completely.
For now, Citigroup executives expressed confidence the bank
would fare well even if there is a chill in U.S. trade. Mr.
Gerspach said the bank has seen a big pickup in trade flowing
between Asian countries. The bank's treasury and trade solutions
unit, which does back-office work for governments and companies
that operate in multiple countries, grew revenue 11%.
PNC Financial Services Group Inc. also reported
higher-than-expected earnings Friday, driven in part by loan growth
in both commercial and consumer lending.
"The consumer is healthy, the housing market is good, corporates
are active," said CEO Bill Demchak. "Things feel pretty good,
almost really good."
Write to Emily Glazer at emily.glazer@wsj.com and Christina
Rexrode at christina.rexrode@wsj.com
(END) Dow Jones Newswires
July 13, 2018 16:25 ET (20:25 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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