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Big banks beat profit expectations but warning signs grow

JPMorgan Chase & Co and Wells Fargo & Co both reported drops in net interest margins as they paid more for deposits.

[NEW YORK] Three big US banks reported strong earnings on Tuesday, even as warning signs emerged that the playing field is beginning to tilt against the financial industry.

While the biggest risk ahead is that lower interest rates will pressure banks' bottomlines in the coming months, the squeeze is already beginning.

JPMorgan Chase & Co and Wells Fargo & Co both reported drops in net interest margins as they paid more for deposits. JPMorgan, the world's biggest bank, lowered its outlook for net interest income to "about US$57.5 billion" in 2019 from the US$58-plus billion it estimated in February.

On Monday, Citigroup similarly reported a decline in net interest margin.

Most bank stocks fell initially in early trading on Tuesday, before some recovered.

In late morning trading, shares of JPMorgan were up 1 per cent at US$115.10; Goldman Sachs Group Inc - the least rate-sensitive of the three banks - climbed 1.3 per cent to US$214.37, and Wells Fargo fell 1.7 per cent to US$45.89.

"We're not as dynamically correlated to rate changes," Goldman Sachs Chief Financial Officer Stephen Scherr told analysts, noting the bank holds fewer deposits "than the big commercial banks."

Trading volumes have dropped at large US banks as a tit-for-tat tariff war between Beijing and Washington has kept investors on edge. A flattening of the Treasury yield curve and rising bets for a US interest rate cut have also challenged banks' ability to boost revenues.

Investors worry that if the US Federal Reserve cuts interest rates in July, it could pressure margins at banks, which have benefited recently from higher rates. JPMorgan now expects as many as three rate cuts by the Federal Reserve, Chief Financial Officer Jennifer Piepszak said.

There was good news in the earnings reports as well. The consumer business remained buoyant, offsetting weakness in other areas. At JPMorgan Chase, average loans increased 2 per cent on the back of an 8 per cent rise in credit-card loans.

And even as investors have been concerned over the impact of the US-China trade spat on global growth, JPMorgan Chief Executive Officer Jamie Dimon remained bullish about the economy. The bank's performance is often considered a bellwether for the health of the U.S. economy.

"We continue to see positive momentum with the U.S. consumer – healthy confidence levels, solid job creation and rising wages – which are reflected in our Consumer & Community Banking results," he said in a statement.

JPMorgan's net income surged 16 per cent  to US$9.65 billion as a tax gain and higher net interest income overshadowed lower activity on its trading desks. Excluding that tax gain, it earned US$2.59 per share. Net revenue rose 4 per cent to US$29.57 billion.

At Wells Fargo, meanwhile, net income applicable to common stock rose to US$5.85 billion  or US$1.30 per share, in the second quarter ended June 30, from US$4.79 billion, or 98 cents per share, a year earlier.

Goldman Sachs Group Inc's fixed-income business suffered another disappointing quarter with net revenues falling by 13 per cent%, impacted by interest rate products and currencies.

Despite the better-than-expected performance, revenue still fell at three of its four major businesses, with the biggest declines in trading and investment management.

The bank's net earnings applicable to common shareholders fell 6 per cent to US$2.20 billion in the quarter. Earnings per share fell to US$5.81 from US$5.98 a year earlier. Total net revenue fell 2 per cent to US$9.46 billion.