(Bloomberg) -- Banks got a lot of what they’ve been waiting for last quarter.
The return of volatility to equity markets boosted stock-trading revenues across Wall Street, while rising interest rates helped lending operations. And corporate tax cuts sent combined first-quarter profits at the four biggest U.S. banks -- JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Bank of America Corp. -- to the highest since 2007.
“The story on profitability is extremely good,” David Kelly, chief global strategist at JPMorgan Asset Management, told Bloomberg Television in an interview. “The central issue with the stock market right now is encapsulated with the banks. This is about as good as it gets. We’re going to see these huge earnings gains.”
With Goldman Sachs Group Inc. and Morgan Stanley set to report results this week, here’s a look at the trends so far:
Wall Street firms are showing they can benefit from turbulent stock markets, with JPMorgan posting record revenue from equity trading, and Bank of America and Citigroup generating the most money from that business since 2010. Market volatility in the first quarter -- triggered in part by presidential tweets on global trade -- bolstered the banks’ derivatives and prime-services desks.
“The real strength for all three of them came in equity trading,” Gerard Cassidy, an analyst at RBC Capital Markets, said in an interview with Bloomberg Television. “The volatility in the markets came in and helped the equity trading. In particular, equity derivatives benefited both Bank of America as well as the other players.”
Better stock-trading results helped banks compensate for weaker fixed-income revenue. While some of the firms reported improved activity on rates and currencies desks, that wasn’t enough to offset weaker credit trading as they got less of a bump from clients buying and selling newly issued bonds. Volume of U.S. investment-grade bonds in the first quarter dropped 12 percent from a year earlier, while issuance of high-yield debt declined an even steeper 28 percent, according to data compiled by Bloomberg.
JPMorgan, Bank of America and Citigroup benefited as the Federal Reserve raised rates twice in the past four months, meaning they can charge more for loans. All three firms posted higher net interest income in the first three months of the year, which they attributed to higher rates and loan growth.
Wells Fargo, prohibited by the Fed from increasing assets until it addresses recent missteps, didn’t partake in the bonanza as interest income dropped 1 percent. The firm’s average loans also dropped to the lowest since the second quarter of 2016, before the long-simmering scandal involving misleading sales practices at its consumer bank boiled over.
Credit quality remains a top concern for investors as Federal Deposit Insurance Corp. data show credit-card loans reached a record last year. Bank of America and JPMorgan both saw write-offs climb about 8 percent, attributing the increase to souring credit-card loans. Citigroup warned that its cost of credit probably will increase in the current quarter. Still, all of the banks say consumer credit quality is holding up well amid low unemployment.
Rising interest rates typically hurt mortgage lending because home loans become more expensive, discouraging buyers. That held true during the first three months of the year, when the two largest U.S. home lenders started to feel the effects. At Wells Fargo, originations and applications for new loans declined from the fourth quarter. JPMorgan’s originations dropped 25 percent to $18.2 billion.
Bank of America stopped reporting fees from its mortgage business. The revenue line that once regularly topped $1 billion a quarter is now so small that the firm lumped it into “all other income” from its consumer bank.
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