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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