By Christina Rexrode and Peter Rudegeair
The country's biggest Main Street banks this past week gave
encouraging reports about the state of the U.S. economy. The
problem is that most of those banks also call Wall Street home.
Citigroup Inc. on Friday joined the parade of banks reporting
sharply lower trading and investment-banking revenue. But the banks
-- Citigroup, J.P. Morgan Chase & Co., Bank of America Corp.
and Wells Fargo & Co. -- were able to offset that with growth
in businesses such as consumer lending or private banking.
Citigroup posted a 27% drop in first-quarter profit, but
investors nonetheless bid up the New York company's shares for the
week, as the results easily topped the expectations set by industry
analysts.
Earlier in the week, J.P. Morgan, Bank of America and Wells
Fargo also reported falling profit that exceeded expectations. All
four banks' shares rose on the week, with Citigroup's 11% advance
its best week since 2011.
The broader economy is "not a boom but it's getting better,"
said Wells Fargo Chairman and CEO John Stumpf in an interview after
the bank's Thursday earnings report. "The real economy is a bit
stronger than what you might see reflected in the capital and
financial markets."
The bounceback in bank shares during the week reflected
investors' view that a global recession no longer looks imminent,
as many had feared in February. More confirmation of this from the
banks helped push the Dow Jones Industrial Average close to 18000,
a milestone it last hit in 2015. The blue-chip average finished
0.2% lower Friday at 17897.46, but overall it finished the week up
1.8%.
Banks' gains masked a deeper division within the giant
companies, where Wall Street is "so much less attractive a business
than it was 10 years ago," said Erik Oja, an analyst at S&P
Global Market Intelligence. "For the banks that are partly Main
Street, partly Wall Street, they seem to be much happier about the
Main Street business."
Indeed, the banks reported more-resilient consumer revenue, even
while trading and investment banking posted double-digit percentage
declines.
Consumer-banking revenue during the first quarter was up 4% at
Wells Fargo, 3% at Bank of America and 4% at J.P. Morgan. It
declined 6% at Citigroup, though that compared to a 12% drop on the
institutional side of the bank.
J.P. Morgan head James Dimon on Wednesday said he thought the
U.S. would avoid a recession, and he called the consumer
"strong."
But concerns about a global slowdown still muted demand for both
trading, which has slumped for several years, and investment
banking, where deals cooled off in the first quarter after a long
hot streak.
The coming week gets tougher, since Wall-Street-focused firms
Morgan Stanley and Goldman Sachs Group Inc. are scheduled to report
their first-quarter results Monday and Tuesday, respectively, along
with smaller regional banks that can have more loan exposure to
struggling energy companies.
Banks say postcrisis regulations have made it tougher for them
to initiate their own trading strategies to make money. That has
made revenue in the business more dependent on the willingness of
investors to trade.
In the first quarter, investors often weren't willing to do so,
with volatile markets and concerns of a global slowdown keeping
many from buying and selling on bank trading desks.
While activity has picked up with the rebound in stock prices in
March and April, "the outlook is still ripe with risks," said
Citigroup CEO Michael Corbat on a call with investors and analysts
Friday.
Mr. Corbat and the bank's chief financial officer, John
Gerspach, said they weren't expecting trading to fully bounce back
soon, and analysts questioned whether the bank would be able to hit
the financial targets it had previously laid out and hit last
year.
The fastest path for many big banks to boost profitability isn't
in their hands, but in others'. Even with the consumer borrowing
more, a bigger boost in lending profits for banks would likely
require another Federal Reserve interest-rate increase. Even with
the central bank's rate increase in December, Bank of America's
first-quarter net interest income, which helps measure lending
income, was down 2.6% from a year earlier.
The rate increase encouraged many banks that more rate hikes
would come, since the U.S. economy was turning out strong job
reports and growing.
But then, a sharp January drop in the stock market along with
falling bond yields and concerns about European and Asian economies
put the Fed on hold. That sapped the confidence of bank investors
who have been waiting for rising interest rates for years, sending
bank shares to one of their worst quarters since the financial
crisis.
Rising rates generally help bank profits because they allow
lenders to charge a higher rate on loans and tend to come when
economic conditions are strong and demand for loans is solid.
Citigroup overall reported quarterly profit of $3.5 billion, or
$1.10 a share, down from $4.77 billion, or $1.51 a share, a year
ago. Revenue dropped 11% to $17.56 billion. Analysts polled by
Thomson Reuters had projected profit of $1.03 a share on revenue of
$17.46 billion.
Trading revenue, excluding an accounting adjustment, fell 13% to
$3.79 billion from $4.35 billion a year earlier.
"We couldn't step back and look at the quarter and say these are
great numbers," said Susan Roth Katzke, an analyst at Credit
Suisse. "But it is fair to say that these banks have done a good
and credible job in a challenging environment."
--Aaron Kuriloff contributed to this article.
Write to Christina Rexrode at christina.rexrode@wsj.com and
Peter Rudegeair at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
April 15, 2016 19:55 ET (23:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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