The biggest US banks have leaned on retail banking businesses to offset a prolonged slump in trading and drive record profits. Now comes the question of whether they can keep it up.
The lenders, led by JPMorgan Chase & Co. and Bank of America Corp., are delivering on the promise that the stockpiles of deposits they spent years attracting would pay off once the Federal Reserve started hiking rates. Analysts see two threats to the current run: a gentle plateauing of revenue growth as the Fed pauses, and a sharper spike in loan losses if the credit cycle turns.
There were signs of each possibility in the first quarter’s stellar results. Bank of America said net interest income growth will slow over the rest of this year, while Wells Fargo & Co. went even further and predicted a decline. And three of the four largest lenders increased provisions to cover consumer loan losses, with Wells Fargo more than tripling the amount it set aside.
“These are the best of times from an employment perspective, and so as we look out to the end of the year and into the next year we put a little bit heavier weight on the prospect that things are a little bit worse,” Wells Fargo Chief Financial Officer John Shrewsberry said in a Bloomberg Television interview to explain the jump in provisions.
The Fed’s four interest-rate increases last year and a relatively buoyant US economy have boosted what banks can charge for loans, with the average rate the firms earned rising almost 0.5 percentage points in the past year. They’ve also so far been able to limit how much of the hikes they’ve passed on to depositors, instead pitching consumers on the convenience of their branch networks and the billions they’ve poured into digital and mobile platforms.
JPMorgan has been the big winner, topping $5 billion in pretax profit from its consumer unit in each of the past three quarters after not once hitting that level in the previous five years.