By 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 (January 16, 2019).
America's banks are loving higher interest rates.
Rising rates lifted lending revenue for JPMorgan Chase & Co.
and Wells Fargo & Co. in the fourth quarter, the banks said
Tuesday.
Higher rates mean banks can charge more for loans. In theory,
they also have to pay more to depositors. But in practice, banks
have been quicker to raise rates for borrowers than pay more to
customers for their deposits.
Many of those customers seem content, at least for now, to leave
cash in low-yielding accounts instead of moving it elsewhere for
higher returns. In effect, they are leaving money on the table that
translates into bigger bank profits.
JPMorgan's net interest income -- the gap between what it earns
on loans and what it pays on deposits -- rose 10% in the fourth
quarter to $14.4 billion. That helped push overall net income up by
two-thirds to $7.07 billion. The bank's profit in the fourth
quarter of 2017 was hurt by accounting charges related to that
year's tax overhaul.
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 key mortgage business.
So far, many big banks have held off raising their deposit rates
too much, even though the Federal Reserve raised short-term
interest rates four times last year. The average yield on savings
accounts has held steady at 0.09% since January 2018 while average
credit-card rates have gone up 1.09 percentage point to 17.41%,
according to Bankrate.com.
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 7%, more than the decline in the S&P 500
index in that same span.
But bank executives said 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."
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 roughly flat with 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 earlier 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 point to 5.26% while the average rate on its
interest-bearing deposits increased 0.37 percentage point to
0.72%.
Banks saw 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% to $1.32 billion. Wells Fargo's mortgage
volume fell by a similar percentage in the fourth quarter and
refinancing activity fell by more than 50%.
Smaller banks also reported similar results. Shares of First
Republic Bank had a record rise of 12% Tuesday, according to Dow
Jones Market Data, after the bank reported earnings and net
interest income that beat analysts' estimates. The bank's net
interest margin, which measures how profitably it can lend out
depositors' funds, 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
lasts 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."
Corrections & Amplifications Lending revenue rose at Wells
Fargo & Co. in the fourth quarter but its total revenue fell.
An earlier version of this article incorrectly said revenue rose at
the bank. (Jan. 15, 2019)
--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 16, 2019 02:47 ET (07:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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