JPM JP Morgan Chase and Co

By Peter Rudegeair, Telis Demos and Emily Glazer 

Some of the nation's largest banks warned Thursday that the benefits investors anticipated from rising interest rates and the election of Donald Trump as president aren't panning out quite as quickly as many had hoped.

J.P. Morgan Chase & Co. and Citigroup Inc. posted sharp increases in first-quarter profit, fueled by a continued rebound in their Wall Street trading businesses. But the results, along with those from Wells Fargo & Co., highlighted that the rising interest rates, more robust loan demand and pro-growth policies that many bank investors were betting on after Mr. Trump's election had so far failed to yield breakout gains.

Shares at all three banks fell more than the Dow Jones Industrial Average, which dropped 0.7%. Wells Fargo led the way with a 3.3% decline, while J.P. Morgan lost 1.2%.

While bank stocks surged in the wake of Mr. Trump's surprise election victory, they have slipped the past month as investors grow more doubtful about whether broad measures like lending growth and profitability will catch up with loftier valuations.

Bank executives told investors on a series of conference calls that they were sanguine that U.S. policy makers' goals of loosening financial regulations and cutting tax rates would eventually help boost growth.

"When you have a new president and they get going... it's going to be a sausage-making period," J.P. Morgan Chief Executive James Dimon said on a conference call with analysts. To expect it to be smooth, "that would just be silly."

Investors are feeling less patient.

"There are itchy trigger fingers" from investors looking to sell, said Christopher Davis, a veteran portfolio manager at Davis Funds, which manages about $25 billion in assets and recently reported owning large stakes of J.P. Morgan and Wells Fargo.

While he likes the steady and consistent growth both companies are likely to offer in coming years, he says that many investors in recent weeks have grown more worried about banks' lending potential.

At both J.P. Morgan and Citigroup, profit rose 17% in the first quarter, with the capital-markets arms of each bank being the brightest spots of their reports. Wells Fargo, which has a relatively slimmer footprint on Wall Street businesses, said its first-quarter profit was flat.

Commercial loan balances didn't change at J.P. Morgan and Wells Fargo compared with the fourth quarter of 2016. New auto loans declined 17% at J.P. Morgan and 29% at Wells Fargo compared with last year's first quarter. John Shrewsberry, Wells Fargo's finance chief, said that signs of rising delinquencies and deteriorating used-car values are causing the bank to be more cautious.

In Citigroup's North American consumer-banking group, profit fell 25%, driven by credit losses on some credit cards. At J.P. Morgan's and Wells Fargo's consumer-banking arms, profit fell 20% and 9%, respectively.

PNC Financial Services Group Inc. bucked some of the trends, saying stronger loan activity helped its earnings beat expectations Thursday. The Pittsburgh bank attributed the growth in part to markets where it is expanding, including Dallas, Kansas City and Minneapolis.

In coming quarters, big banks hope that interest rates continue climbing, since that would essentially give them more pricing power in lending products.

In March, the Federal Reserve moved its target short term rate higher, its third interest-rate bump in the past two years. Big banks earn more money by lending out their vast deposits when interest rates rise. They also benefit from a larger gap between short term and long term rates, a so-called steep yield curve.

J.P. Morgan said it expects net interest income to rise by about $4.5 billion in 2017. Citigroup said it was now building into future plans an additional rate increase, in June. That would help bump up its expected year-over-year core interest revenue by $1.5 billion over the next three quarters.

But the bank also made a "modest reduction" in expectations for loan growth. Rising rates have a downside in making some loans, especially mortgage refinancing, less attractive to borrowers.

Wall Street trading desks were a bright spot. J.P. Morgan's trading revenue increased 13% to $5.82 billion in the first quarter of 2017, while Citigroup's rose 17% to $4.39 billion. Last year's first quarter was a brutal one for each bank's trading arm, so the latest results are coming off of a low base.

Fixed-income trading revenue was up nearly 20% at each bank, reflecting higher activity in markets for government bonds and other securities closely tied to interest rates. Investment-banking fees at each bank were up nearly 40% thanks in part to underwriting more bond deals for companies looking to lock in low borrowing costs.

"There's good momentum, as we see things now," said Citigroup CEO Michael Corbat. "Client engagement was high, and I think remains high into the second quarter."

Meanwhile, Marianne Lake, J.P. Morgan's finance chief, said on a conference call that she expected the Trump administration's agenda would eventually lead to more hiring, spending and borrowing. But she acknowledged that much of the economic activity hadn't yet arrived. "It's completely understandable that optimism would lead action."

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com, Telis Demos at telis.demos@wsj.com and Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

April 14, 2017 02:47 ET (06:47 GMT)

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