JPMorgan Chase & Co

JPMorgan and Citi fail to impress investors despite strong earnings. Investors fret that the Fed’s rate rises will force them to pay more to depositors.

JPMorgan Chase and Citigroup unveiled strong earnings on Friday, but struggled to quash investor concerns that the Federal Reserve’s interest rate rises will squeeze profit margins.

StockMarketNews.Today – The two banks both unveiled double-digit percentage rises in net income from a year ago, helped by corporate tax cuts and solid performances from investment-banking divisions. Their figures stood in contrast to Wells Fargo, whose revenues and profits declined as it grapples with a series of compliance problems.

Shareholders were underwhelmed by the figures, however, extending a sell-off in bank stocks that began after a historic rally propelled them to a post-crisis high in January.

Investors had anticipated that rising rates should be a boon for banks, allowing them to push up interest charges for borrowers, increase rates for depositors more slowly, and pocket the difference.

Yet the second-quarter earnings painted a muddier picture, as some parts of the businesses showed pressure from higher interest rates.

There are signs higher borrowing costs are hurting demand for some loans. Fees from mortgage banking at Wells fell a third from a year ago to $770m.

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Analysts also highlighted that Wells, JPMorgan and Citi were all paying more for their funds. JPMorgan’s interest expenses jumped 56 per cent from a year ago to $5.4bn as its interest-bearing deposit rates doubled to 0.5 per cent. Wells’ deposit expenses leapt 87 per cent to $1.27bn.

“They weren’t paying anything a few years ago — it’s extremely competitive now,” said Christopher Whalen, a bank analyst. “The cost of that money is going up a lot. Where you’re really seeing the pressure is market funding — bonds, interbank funding. All of that reflects higher rates.”

JPMorgan’s total net interest income nevertheless rose a tenth to $13.5bn, helped by yields on loans and higher lending volumes.

Jamie Dimon, chief executive, cautioned that global trade concerns could dent the confidence of corporate America in the months ahead. “There are unpredictable outcomes if you start skirmishes like this with multiple countries,” he said. “It’s a worry. Hopefully it gets resolved.”

Mr Dimon added, however, that so far “it’s kind of affecting psyche more than it is economics”.

While corporate and institutional depositors and wealthy customers with large savings pools are demanding higher rates, the largest US retail banks have largely managed to avoid passing on rate rises to regular consumers, a phenomenon known in the industry as a low deposit “betas”.

Michael Corbat, Citi’s chief executive, said consumers may soon “clamour” for higher rates on their deposits, as the gaps between rate rises from the Fed begins to narrow. “As you get to the point where [the Fed] increases rates in a much more rapid fashion, you’ll see those betas continue to increase,” he said.

John Shrewsberry, Wells chief financial officer, said: “You can pretty easily imagine that the Fed goes a couple more times this year.” He added that would probably increase calls from depositors “to say, ‘Hey, I’d like to get paid a little bit more’”.

JPMorgan’s forecast-beating results were supported by its capital markets and investment banking businesses. Fees from investment banking leapt 17 per cent to $2.2bn. Fixed income markets trading revenue climbed 12 per cent, excluding certain items, while equities trading revenue jumped 24 per cent.

Citi’s investment bank performance lagged behind its rival’s. Its fees from debt trading slipped 6 per cent from a year ago, to $3.1bn, while revenues from advising companies on mergers and capital raising were 7 per cent lower at $1.4bn.

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