US Bank Stocks Weaken as Higher Rates Hit Bond Trading

Third-Quarter Growth Slows From the Second Quarter

Inflation, Geopolitical Unease Weigh

Optimism Persists That US Consumers Are Driving Growth

Major US banks including JPMorgan Chase and Goldman Sachs failed to match the boom they enjoyed in the second quarter this year. Stock trading, one of their main fee businesses, remained strong, but higher interest rates dealt a bigger blow to bond trading. Profitability was also pressured by reserves set aside against potential bond losses if rates rise further, pushing bond prices lower. Investors are increasingly concerned that if high rates persist, the damage to Wall Street banks' earnings will grow.

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 third-quarter revenue of $50.17 billion and net income of $15.31 billion, up 8.1% and 6.4% from a year earlier, respectively. Goldman Sachs and Citigroup posted net income of $5.29 billion and $5.25 billion, up 29.1% and 39.8% from the third quarter of last year. The results broadly matched market estimates. JPMorgan's earnings per share missed consensus by 3.2%, while the other three beat estimates by as much as 32.3%, led by Goldman Sachs.

But the market reaction was cold. Citigroup shares fell 5.6% and Wells Fargo dropped 3.1% that day, with all four bank stocks declining after the results were released. Investors focused on the loss of momentum from the previous quarter. At all four banks, revenue fell 3.3% to 12.5% from the prior quarter, while net income dropped 7.1% to 27.6%.

Weak bond-trading results, a key source of bank revenue, added to those concerns as rates climbed. JPMorgan said revenue from fixed income, currencies and commodities, or FICC, trading fell 4% from a year earlier in the third quarter. Goldman Sachs also posted a 1% decline in FICC trading revenue from the same period a year earlier.

On conference calls after the earnings releases, 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 major risks.

A slowdown since last month in clients' corporate-finance activity also weighed on sentiment. That included mergers and acquisitions, initial public offerings and corporate bond issuance by companies and private equity firms. The pullback was attributed to the rise in the US 10-year Treasury yield to its highest level in about 25 years earlier this month.

Some on Wall Street remain optimistic. They point to no clear warning signs in consumer indicators such as loan delinquencies and deposit balances. According to The Wall Street Journal, 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. Citigroup Chief Executive Officer Jane Fraser said the global economy, led by the US, had held up remarkably well. Consumer spending is driving a substantial share of growth.

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