Results at J.P. Morgan and Citigroup point to worsening quality of consumer credit
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 (October 13, 2017).
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Growth in credit-card lending and a tight rein on costs boosted third-quarter profits at J.P. Morgan Chase & Co. and Citigroup Inc., offsetting downbeat trading results and a still-challenging interest-rate environment.
The results, though, pointed to early signs of a potential deterioration in consumer-credit quality, which could be a concern for a host of lenders and credit-card issuers.
The results from J.P. Morgan and Citigroup, the Nos. 1 and 4 U.S. banks by assets, respectively, showed modest increases in revenue. But the focus on costs led net income to rise 7.1% at J.P. Morgan to $6.73 billion and 7.6% to $4.13 billion at Citigroup.
"We tightly managed our expenses and again saw loan and deposit growth in both our consumer and institutional businesses," Citigroup Chief Executive Michael Corbat told analysts on Thursday.
Citigroup's efficiency ratio, or expenses as a percentage of revenue, improved to 56% for the quarter, better than the bank's target of 58% for the year. J.P. Morgan's fell to 55% from 57% a year earlier.
Both firms managed to beat Wall Street expectations for both revenue and earnings per share. Their stocks fell, though, as the results gave investors few reasons to think shares could build markedly on heady gains experienced in the wake of last year's presidential election.
Since Donald Trump's victory, Citigroup's stock has advanced by nearly 50% and J.P. Morgan shares are up nearly 40%. Both have outpaced the broader stock market and the KBW Nasdaq Bank index.
Those gains reflected investor expectations for stronger economic growth, higher interest rates and looser regulations. But many of those hopes, such as for tax reform that would boost banks' profits, have yet to materialize.
J.P. Morgan shareholder Jason Ware, chief investment officer of Salt Lake City-based Albion Financial Group, said the banks' results were "solid but perhaps not exceptional" and largely in line with expectations.
And on the all-important interest-rate front, the experience so far this year has been mixed. Rates have moved higher as the Federal Reserve has increased its short-term benchmark, but longer-term yields haven't risen by as much.
That puts pressure on banks' net-interest margins, or the difference in what they earn by borrowing and lending money. These margins declined at Citigroup from a year ago, while they rose slightly at J.P. Morgan. At both banks, though, the margins remain historically low.
And while net income grew at both banks, return on equity, a key measure of profitability, remained relatively subdued. J.P. Morgan's return for the third quarter was 11%. That is above by the bank's theoretical cost of capital of 10%, but not by much.
Citigroup, meanwhile, posted a return of just 7.3%. Although this is up from 6.8% in the prior quarter and a year earlier, it is still well below the 10% level. Citigroup for years hasn't posted a return that consistently cleared that hurdle.
The banks also had to combat a decline in trading revenue in the third quarter, as financial-market volatility remains at historically low levels. J.P. Morgan's trading revenue dropped 21% to $4.53 billion, hurt by a 27% falloff in fixed-income trading. Citigroup's trading desk didn't suffer as sharp a decline, but trading was still down 11% from a year ago to $3.63 billion.
J.P. Morgan finance chief Marianne Lake said during a call with analysts that the bank expects sluggish trading activity to continue into the fourth quarter and there were "no obvious catalysts on the horizon."
Both banks found bright spots with consumers.
Citigroup said it saw a 12% rise in revenue in its core North American retail-banking unit, to $1.2 billion, in part as more customers used its wealth-management services. It also saw a 6% jump in credit-card lending globally.
"We would rate the health of the consumer right now as pretty good," Mr. Corbat said. "The combination of jobs, a little bit of wage growth, stable housing, and rising asset prices has left the consumer in a pretty good place."
J.P. Morgan also saw growth in its consumer unit, including an 8% rise in U.S. interest-bearing deposits. Ms. Lake said revenue in its credit-card business is expected to grow.
However, there are early signs that credit quality is slipping. Consumer payback rates have been a concern for lenders across the board, even as the U.S. labor market remains robust.
Citigroup set aside $2.15 billion in the third quarter to cover loans that could turn bad in the future, about $400 million more than a year ago. Much of that uptick in provisions was for credit-card loans.
The bank said that future charge-offs were increasing more quickly than anticipated, though not to alarming levels. Its forecast went from a 2.85% loss rate for the year to 2.95% next year for Citigroup-branded cards.
"That's a little bit higher than what we had previously considered," Citigroup finance chief John Gerspach told analysts.
Meanwhile, charge-offs for so-called store cards rose to 4.7% in third quarter from 3.9% a year earlier.
J.P. Morgan set aside $1.46 billion in reserves in the third quarter, up from $1.13 billion a year earlier.
At Citigroup, there was another cause for concern. Revenue from branded cards, which Citigroup markets directly to consumers, declined 1% from a year ago.
The bank previously had suggested the second half of 2017 would deliver growth after years of investments -- such as paying to take on the card business of Costco Wholesale Corp. -- bore fruit.
"As late as June, we believed that... we'd be able to deliver at least some level of year-over-year revenue growth," Mr. Gerspach said. He added the bank was seeing tough competition in cards, where rivals have been offering increasingly generous inducements.
Mr. Gerspach said he still expected the bank's newest products, such as the Costco cards, to eventually deliver healthy growth. "In trying to build this balance portfolio, we're going to need to make adjustments as we go along," he added.
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(END) Dow Jones Newswires
October 13, 2017 02:47 ET (06:47 GMT)