Big banks aim to show higher profits still ahead as rates rise

Bloomberg

As concerns from bank investors go, “peak profitability” seems an unusual one. But as the biggest US banks report results that analysts estimate will set a new high for profitability this decade, shareh-olders are wondering: is this as good as gets, or is Jamie Dimon right that banks are entering a golden age.
“The quarter will be fine,” Susan Katzke, a bank analyst at Credit Suisse Group AG, said in a note to clients. “It’s more about the forward look.”
JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. kick off earnings season for US banks on Friday. Lenders are benefiting from interest rate hikes and a healthy economy, while they’ve tamped down expectations for loan growth and their trading businesses. Banks will try to reverse the recent trend of underperforming the broader stock market and assuage fears that they’re near “peak profitability” in the late stages of the economic cycle, Bernstein’s John McDonald said in a note last week.

LOAN GROWTH
While the US economy has taken off, banks’ loan growth hasn’t kept pace. Analysts are anticipating modest loan growth once again in the third quarter — Keefe Bruyette & Woods Inc.’s Brian Kleinhanzl expects loans will be up 2.4 percent from a year ago.
Rising interest rates are helping lending margins, but they’re also sapping demand for borrowing in areas such as mortgages. Traditional banks are facing increased competition from nonbanks such as insurers and private equity, and the boom in corporate lending after US tax reform is taking longer to appear than some expected. “It’s taking a while for tax cuts to work their way through the system,” Barclays Plc analyst Jason Goldberg said in an interview.

TRADING
While Wall Street trading desks got off to a fast start in 2018, they couldn’t avoid the typical summer slowdown. Analysts expect trading revenue to be roughly flat from last year’s third quarter and down from the second quarter as market volatility subsided.
Earlier this month, JPMorgan Chief Financial Officer Marianne Lake said the bank’s trading revenue will probably drop by about mid-single digits from a year earlier, while Citigroup CFO John Gerspach said his firm may see a slight increase. Equities trading units will probably have a better relative performance than their fixed-income counterparts, according to Credit Suisse’s Katzke.

PROFITABILITY
For all the concerns, the industry hasn’t seen these heights in a long time. The biggest lenders’ third-quarter profits are likely to take their returns on tangible equity to 14 percent over the past 12 months, the best since the financial crisis, Goldman Sachs analyst Richard Ramsden wrote in a note this month.
Banks’ profitability metrics are benefiting from lower tax rates, declining legal bills and record shareholder payouts after this year’s round of Federal Reserve stress tests. The firms have also kept a tight lid on costs even as they spend more on technology. Dimon, JPMorgan’s chief executive officer, said in June that the banking industry is entering a “golden age” on better returns and looser regulations.
Bank stocks haven’t reflected that. The KBW Bank Index is little changed in 2018, while the S&P 500 Index has climbed 7.9 percent. The banking index also trailed the broader market last year.
Deals are happening — they’re just not closing yet. That’s the message from bankers who saw a 72 percent drop in completed mergers and acquisitions in the third quarter, according to data compiled by Bloomberg.