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Big banks' profits soar, helping stock market end skid

Big banks' profits soar, helping stock market end skid
The logo for Wells Fargo appears above a trading post on the floor of the New York Stock Exchange. (Richard Drew / Associated Press)

Three major banks reported solid earnings Friday, helping ease worries on Wall Street and sending stocks upward — if only slightly — after a two-day sell-off.

Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup each posted double-digit percentage gains in profit, boosted by higher interest rates and lower federal taxes under the GOP-backed tax cuts approved last year.

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The higher profits, coupled with bank executives’ rosy economic outlook, were welcome news for investors, who were watching the results closely for signs about the health of the U.S. economy amid a week of stock-market turbulence leading up to this quarter’s earnings season.

“Again, the economy is strong. The economy could be strong for a while,” JPMorgan Chief Executive Jamie Dimon said on a conference call Friday morning. “Wages are going up, participation is going up, credit is pristine, housing is in short supply. … That could drive a lot of growth for a while.”

JPMorgan and Citi both reported results that topped Wall Street estimates. Wells Fargo reported mixed earnings, with better-than-expected revenue but profit that fell short of analysts’ expectations. The overall positive earnings helped push the benchmark S&P 500 index up by more than 1% by the close of trading.

Ken Leon, a bank equity analyst at research firm CFRA, said results overall were “ho-hum,” but that banks reported no major problems and showed that American consumers appear to be doing well, taking out loans and spending on credit cards but not taking out dangerous amounts of debt.

“Consumer activity looks very good,” Leon said. “This probably sets up for a strong fourth quarter.”

Wells Fargo reported third-quarter revenue of $21.9 billion, topping analysts predicted revenue of $21.8 billion, which was in line with last year’s third quarter. But the bank’s earnings per share of $1.13, a marked improvement over the same quarter last year, didn’t meet expectations. Analysts surveyed by data provider FactSet had expected earnings of $1.19 a share.

The bank reported a mixed bag in its lending business, with total loans shrinking compared with both the previous quarter and last year’s third quarter. It saw a $2.8-billion decline in commercial real estate loans and continued to shrink its subprime auto-loan business, though other types of business loans and credit card lending rose. Despite the overall decline in loans, the bank earned marginally more interest income thanks to higher interest rates, which are on the rise.

After leaving its benchmark interest rate near zero for years following the recession, the Federal Reserve has steadily increased rates since 2015. This year, the Fed has hiked rates three times — taking the fed funds rate to a range of 2% to 2.25% — and officials have suggested that they may raise rates once more before January to head off inflation.

This week’s market tumult was triggered in part by investors’ concerns that higher borrowing costs for corporations and consumers could dampen economic growth. President Trump went so far as to say the Fed, led by his appointee Jerome Powell, is “out of control” and “going loco.”

On a conference call Friday, Wells Fargo Chief Executive Tim Sloan did not reference the controversy but said that the bank’s loan growth was weaker than might be expected in part because there was little need for more capital by corporate clients.

“Their balance sheets are strong,” he said. “So I think the fact that we've got very buoyant capital markets, very liquid capital markets, and we have high credit quality for our customers means that loan growth is a little bit slower than we would have all imagined in an economic growth level that we're seeing right now.”

The bank’s profits — which totaled $6 billion, up 32% over last year’s third quarter figure — were boosted by cost cutting and lower corporate taxes. Wells Fargo shuttered 88 branches in the third quarter alone and has closed or sold more than 250 over the past year.

The bank, which continues to deal with the fallout from a series of scandals stemming from consumer abuses, is operating under an asset cap mandated earlier this year by the Federal Reserve. Sloan said Friday that he expects the bank to continue operating into next year under the cap, which limits the bank’s growth while it improves its corporate governance.

JPMorgan, the nation’s largest bank by assets, reported earnings of $8.38 billion, or $2.34 per share, for the quarter, both ahead of analysts’ expectations, according to FactSet.

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The bank reported solid revenue growth from many of its lending businesses, including consumer and small-business banking, credit cards and commercial banking, driven by higher interest rates. Mortgage banking was one exception, with higher interest rates accounting for markedly fewer new loans and lower revenue there. Overall, the bank’s loan portfolio ticked up 1% compared to that of this year’s second quarter and 4% compared to that of last year’s third quarter.

Because of higher interest rates, the bank’s interest income climbed 9% compared with the year-ago quarter, contributing to an overall increase in profits of 24%.

While not specifically mentioning the U.S.-China trade war — another uncertainty that has contributed to the stock market’s recent volatility — Dimon cautioned that there may be trouble ahead for the economy despite its current strong performance.

“The U.S. and the global economy continue to show strength, despite increasing economic and geopolitical uncertainties, which at some point in the future may have negative effects on the economy,” he said in Friday’s earnings announcement.

Citigroup, which also released results Friday, reported better-than-expected earnings for the quarter. The bank reported earnings of $1.73 a share, beating analysts’ expectations of $1.68. Revenue of $18.4 billion was in line with expectations. The bank’s loan portfolio grew, up 1% over the previous quarter and 3% over that of last year’s third quarter, with interest income also higher.

Citi gained 2.1% on the day at $69.84, Wells Fargo gained 1.3% at $52.11, and Chase gave back its early gains to lose 1% at $106.95.

2:30 p.m.: This article was updated with the banks closing stock prices Friday.

12:40 p.m.: This article was updated with additional analysis, background and comments from Wells Fargo CEO Tim Sloan and bank analyst Ken Leon.

9:40 a.m.: This article was updated with additional comments from JPMorgan’s Jamie Dimon, an update on early stock trading and financial information for Citigroup.

This article was originally published at 5:35 a.m

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