Banks are expected to be among the main beneficiaries of the new era of
rising interest rates, increased inflation, and deregulation that is
expected under the Trump administration. JPMorgan Chase, the largest U.S.
bank by assets, is already starting to reap the benefits of the new
The company reported a modest 2% increase in revenue, to $24.3 billion in
the quarter (figures in U.S. dollars). But net income rose almost 24% from
the previous year to $6.7 billion ($1.71 per share) from $5.4 billion
($1.32 per share) in the same period of 2015.
The surprise market surge that followed Donald Trump’s upset election
victory was a prime contributor to the fourth-quarter gains. The company’s
Corporate and Investment Bank showed a 20% increase in net revenue, to
almost $8.5 billion, while profit almost doubled to $3.4 billion, from $1.7
billion in 2015. Also contributing to the profit gain was a reduction in
JPM’s provision for credit losses, which dropped to $864 million from $1.3
Rising interest rates are expected to benefit all the banks because they
enhance the spread between how much interest a bank pays on deposits and
how much it can collect on its loans. The wider the spread, the more money
the bank earns.
JPMorgan is on record as saying a one percentage point increase in rates
will add $3 billion in loan profits over a year. Fourth-quarter results
began to reflect that, with net interest income up 5% to $12.1 billion,
primarily driven by loan growth and the impact of higher rates. If the
Federal Reserve Board raises its key rate three more times this year, as
expected, JPM’s net interest income will continue to benefit.
…and the negative
For the negative side of the banking story, let’s look at Wells Fargo &
Co. This company has been embroiled in a scandal involving the fraudulent
opening of some two million accounts as employees tried every trick in the
book to make unrealistic sales quotas. In the aftermath, the CEO was
roundly condemned before a Congressional committee and eventually resigned.
The company’s fourth-quarter report, the first full quarter since the
scandal became public, clearly showed that the public was paying attention.
The Community Banking segment, which was the division of the company
responsible for the fake accounts, saw a year-over-year drop in revenue of
5.4%, to $11.7 billion from $12.3 billion in 2015. Net income was $2.7
billion, off 13.8% from a year ago. Credit card applications plunged 43%
from the year before.
Overall, the bank saw a drop in earnings per share for the year from $4.12
in 2015 to $3.99 in 2016. Return on equity declined to 11.5% for the year
from 12.6%, and was only 10.9% in the fourth quarter.
The new CEO, Tim Sloan, tried to put a positive spin on the dreary results.
“We continued to make progress in the fourth quarter in rebuilding the
trust of our customers, team members, and other key stakeholders,” he said.
“I am pleased with the progress we have made in customer remediation, the
ongoing review of sales practices across the company, and fulfilling our
regulatory requirements for sales practices matters.
“As planned, we launched our new Retail Bank compensation program this
month, which is based on building lifelong relationships with our
customers. While we have more work to do, I am proud of the effort of our
entire team to make things right for our customers and team members and to
continue building a better Wells Fargo for the future.”
Like JPMorgan Chase, Wells Fargo is benefitting from rising interest rates.
Net interest income in the fourth quarter increased $450 million from the
previous quarter to $12.4 billion. Net interest margin increased five basis
points, to 2.87%.
Wells Fargo’s stock price has rebounded from the low of $43.55 it reached
in October after the news broke of the fraudulent accounts. But it’s
lagging well behind its competitors in terms of investor enthusiasm. Shares
in JPM are up 53% from the 52-week low of $57.05, while those of WFC have
gained only 27%.
It’s going to take some time before Wells Fargo is able to regain public
confidence, which is essential for a retail-oriented bank. In the meantime,
there are much better banking opportunities out there.
is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
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The foregoing is for general information purposes only and is the opinion
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