US Bank Stocks Slip as Higher Rates Cut Into Bond Trading

Earnings growth slows from the second quarter

Inflation, geopolitical uncertainty weigh

Some still see US consumers driving growth

Major US banks including JPMorgan Chase and Goldman Sachs failed to match the boom they enjoyed in the second quarter during the third quarter. Stock trading remained strong, but a slowdown in bond trading as interest rates rose took a bigger toll. Banks also set aside reserves against potential losses on bonds if rates climb further, adding to pressure on profitability. Investors are increasingly concerned that a prolonged period of high interest rates will weigh more heavily on Wall Street banks.

JPMorgan, Goldman Sachs, Citigroup and Wells Fargo reported third-quarter results on Oct. 13. All four posted higher revenue and net income than a year earlier. JPMorgan reported revenue of $50.17 billion and net income of $15.31 billion, up 8.1% and 6.4%, respectively, from a year earlier. Goldman Sachs and Citigroup posted third-quarter net income of $5.29 billion and $5.25 billion, up 29.1% and 39.8% from the same period last year. The results were broadly in line with market estimates. JPMorgan's earnings per share fell 3.2% short of consensus, while the other three beat expectations by as much as 32.3%, in Goldman Sachs's case.

The market response was cold. Citigroup shares fell 5.6% and Wells Fargo dropped 3.1% that day, with all four banks closing lower after reporting results. Investors focused on the loss of momentum from the previous quarter. Across the four banks, revenue fell 3.3% to 12.5% from the prior quarter, while net income declined 7.1% to 27.6%.

Weak bond-trading performance, one of banks' main profit engines, added to investor concern as rates climbed. JPMorgan said third-quarter revenue from fixed income, currencies and commodities trading fell 4% from a year earlier. Goldman Sachs also reported a 1% decline in FICC trading revenue from the same period last year.

On post-earnings conference calls, bank executives struck a cautious tone on the outlook. JPMorgan cited large fiscal deficits, stubborn inflation, elevated asset prices, rising interest rates and geopolitical uncertainty as key risks.

A slowdown since last month in client activity such as mergers and acquisitions, initial public offerings and corporate bond issuance by companies and private equity firms also weighed on sentiment. The retreat was tied to the rise in the US 10-year Treasury yield, which climbed earlier in October to its highest level in about 25 years.

Still, some see reasons for optimism. No clear warning signs have emerged in consumer-related indicators such as loan delinquency rates and deposit balances. The Wall Street Journal reported that spending on JPMorgan credit and debit cards rose 10% from a year earlier in the third quarter, while credit-card spending at Wells Fargo and Citigroup increased 11% and 12%, respectively. "The global economy, led by the US, has held up remarkably well," Citigroup Chief Executive Officer Jane Fraser said. "Consumers are driving a large part of growth."

Hwang Jung-soo, New York correspondent, Hankyung.com, hjs@hankyung.com