Higher interest rates boost US bank earnings

Higher interest rates boost US bank earnings

A Wells Fargo logo is seen in New York City
A Wells Fargo logo is seen in New York City, U.S. January 10, 2017. REUTERS/Stephanie Keith

NEW YORK: A solid US economy and rising interest rates boosted the profits of large US banks, according to earnings reports on Friday (Oct 12), despite President Donald Trump's antagonism to rate hikes by the central bank.

The results from JPMorgan Chase, Citigroup and Wells Fargo followed a two-day stock market rout that Trump blamed on the Federal Reserve in his attacks.

The stock losses were sparked in part by a sudden rise in 10-year US Treasury bond yields, which raised fears that higher interest rates would dent economic growth.

But the trio of bank results helped Wall Street stage a rally on Friday to win back some of the losses over the last 48 hours.

The broad-based S&P 500 finished up 1.4 per cent to 2,767.13, after having declined by more than five per cent over the prior two days.

"Certainly the US economy is performing very, very well," said Citigroup Chief Financial Officer John Gerspach.

He said the jump in Treasury yields is not surprising as the US and other major economies exit a period of extraordinarily low interest rates after the 2008 financial crisis.

"All you're seeing now is the market trying to find the right level for the 10-year rate," Gerspach said.

JPMorgan Chief Executive Jamie Dimon also offered an upbeat assessment.

"The economy is still very strong ... despite these overseas geopolitical issues bursting all over the place," he told reporters.

And the Fed's decisions to increase interest rates were welcome when they are in response to strong growth, as is currently the case, he said.

Big banks have seen a big drop in mortgage refinancings due to higher interest but have yet to see some other unwelcome events that usually accompany higher rates, such as a big jump in customer defaults on credit cards.

But Dimon expressed concern about an ongoing trade fight between the US and China, which he listed among a series of "increasing economic and geopolitical uncertainties" that could dent the economy.

Other worries include Brexit, unwinding massive central bank bond-buying programs and geopolitical concerns from Italy and Saudi Arabia.

Shares of JPMorgan finished 1.1 per cent lower at US$106.95. Citigroup gained 2.1 per cent to US$690.84, while Wells Fargo won 1.3 per cent to US$52.11.

CFRA Research analyst Kenneth Leon said the market's mixed reaction to the reports reflects unease over the prospects of higher interest rates and "whether or not that will slow down the US economy."

PROFITS JUMP

JPMorgan, the biggest US bank by assets, reported third-quarter profit of US$8.4 billion, 24.5 per cent jump from the year-ago period. Revenues increased 5.2 per cent to US$27.8 billion.

Citigroup reported an 11.8 per cent rise in profits to US$4.6 billion, even as revenues dipped 0.2 per cent to US$18.4 billion.

Wells Fargo reported third-quarter profit of US$6.0 billion, a gain of 32.2 per cent from the year-ago period. But revenues inched up to US$21.9 billion from US$21.8 billion in the year-ago period.

Banks typically see higher profits when interest rates go up because they are able to charge more for loans. While this benefit can be blunted somewhat because of higher payouts for deposits, analysts generally view the positives of higher rates as offsetting the negatives.

All three banks reported increases in net interest income, and JPMorgan and Citigroup scored gains in overall loans compared with the year-ago period.

Wells Fargo's total loans fell compared with the year-ago period, although commercial loans were slightly higher.

Unlike the other two banks, deposits also fell at Wells Fargo, suggesting it has not completely shaken the effects of a fake accounts scandal in 2016.

Wells Fargo has revamped its employee incentive systems and replaced executives following the scandal.

Chief Financial Officer John Shrewsberry pointed to some positive business trends, including growth in primary consumer checking customers and increased debt and credit card usage.

Source: AFP/ec

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