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Economy Heats Up Profits at Big Banks -- WSJ

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07/14/2018 | 08:48am CEST

By Emily Glazer and Christina Rexrode

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 (July 14, 2018).

JPMorgan Chase & Co. and Citigroup Inc. posted double-digit profit increases in the second quarter as businesses and consumers showed confidence in stronger economic growth by borrowing more, although investors remained wary in the face of trade conflicts and interest-rate uncertainty.

The performance of the two banks reflected continued employment gains in the U.S., a boom in deal-making among companies and increasing investment by businesses flush with more cash following the recent tax-code overhaul.

JPMorgan Chief James Dimon said the economy was charging ahead on most fronts, bolstering banks. "If you're looking for potholes out there, there are not a lot of things," he said.

Trade and tariff disputes hadn't put a damper on results, either. While customers at the two banks, whose businesses span the globe, were worried, Mr. Dimon said that so far this was "affecting psyches more than economics."

Investors, however, weren't swayed. After ramping up bank shares following Donald Trump's election, Wall Street has grown cautious on big banks this year due to a stall in long-term interest rates that can weigh on profits and which many view as signaling an increasingly greater possibility of a recession.

A growing divergence in the economic performance of the U.S. and the rest of the world has also weighed on bank shares.

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 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 changes, 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 10%. 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 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. Citigroup finance chief John 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

Stocks mentioned in the article
ChangeLast1st jan.
CITIGROUP -0.86% 74.15 Delayed Quote.0.51%
JP MORGAN CHASE & COMPANY -0.66% 117.85 Delayed Quote.10.93%
WELLS FARGO -1.01% 54.99 Delayed Quote.-8.44%
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Financials ($)
Sales 2018 111 B
EBIT 2018 46 038 M
Net income 2018 31 259 M
Debt 2018 -
Yield 2018 2,28%
P/E ratio 2018 12,84
P/E ratio 2019 11,83
Capi. / Sales 2018 3,56x
Capi. / Sales 2019 3,40x
Capitalization 396 B
Duration : Period :
JP Morgan Chase & Company Technical Analysis Chart | MarketScreener
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Technical analysis trends JP MORGAN CHASE & COMPANY
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 30
Average target price 119 $
Spread / Average Target 1,2%
EPS Revisions
James Dimon Chairman & Chief Executive Officer
Gordon A. Smith Co-President & Co-Chief Operating Officer
Daniel E. Pinto Co-President & Co-Chief Operating Officer
Marianne Lake Chief Financial Officer & Executive Vice President
Lori A. Beer Chief Information Officer
Sector and Competitors
1st jan.Capitalization (M$)
BANK OF AMERICA5.12%311 534
WELLS FARGO-8.44%267 536
CITIGROUP0.51%188 217