NEW YORK (Reuters) - Three of the largest U.S. lenders reported double-digit profit increases on Friday, helped by an expanding economy and lower taxes, and forecast more growth ahead as long as current trends continue.
Banks benefited from strong loan demand in the latest quarter, with lending rates rising faster than funding costs, stock market activity boomed and the Trump administration provided a business-friendly environment in Washington.
As a result, banks’ net interest margins - the difference between what they pay for deposits and what they charge for loans - widened. Other key businesses, like managing customers’ wealth or providing treasury services for corporations, generated consistent fees that padded the bottom line.
Banks also got a lift from cost-cutting programs they implemented after the 2007-2009 financial crisis, as well as tax cuts signed into law by President Donald Trump last year. Combined, those factors are saving the industry billions of dollars each quarter.
“Wages are going up. Participation is going up. Credit that’s been written is pristine. Housing is in short supply. Confidence - both small business, consumers - is extraordinarily high, and that could drive a lot of growth for a while despite some of the headwinds out there,” JPMorgan Chase & Co Chief Executive Officer Jamie Dimon told analysts on a conference call.
A view of the exterior of the JP Morgan Chase & Co. corporate headquarters in New York City May 20, 2015. REUTERS/Mike Segar/Files
“It is a good time for the banks,” said Allen Tischler, a bank analyst at Moody’s Investors Service.
Loans are performing well and banks do not seem to be stretching to make riskier ones to generate growth, he said. Credit conditions are strong enough to allow banks to trim capital cushions to increase shareholder payouts, something investors have enjoyed, he added.
DIMON SEES SOME RISKS
Although the industry is prospering, third-quarter results did not uniformly impress analysts and investors.
Wells Fargo, for instance, is still struggling with the effects of a wide-ranging sales scandal that erupted more than two years ago, and its mortgage business is suffering from a sharp downturn in refinancing. Even as it reported a substantial rise in profits, its earnings per share missed estimates by a penny.
JPMorgan’s bond trading business suffered a 10 percent decline in revenue compared with the year-ago period. The business has been challenged across Wall Street for several years due to new regulations and changing customer preferences. JPMorgan’s finance chief, Marianne Lake, said increased competition has made it harder to hold onto market share at a time when margins are thinning.
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Dimon discussed several issues that could dent the industry’s profitability, ranging from geopolitical tensions to Brexit and inflation.
Short-term interest rates could go up to 4 percent as central bankers try to prevent higher inflation, and investors may not be ready for that, Dimon said. This week, the Dow Jones Industrial Average fell 800 points, with analysts citing concerns about U.S. Federal Reserve policy.
“The market may not take it that well if rates go up,” Dimon said.
Wells Fargo shares closed up 1.3 percent at $52.11, Citigroup shares closed up 2.1 percent at $69.84 while JPMorgan shares fell 1 percent to $106.95.