JPMorgan’s Lending Outlook Suffers From Fed’s Rate Reversal

(Bloomberg) -- JPMorgan Chase & Co. was hit by the Federal Reserve’s about-face on interest rates in the second quarter, warning that lending income will fall in the second half.

The largest U.S. bank on Tuesday cut its full-year outlook for net interest income -- revenue from customers’ loan payments minus what the bank pays depositors -- by $500 million. NII accounted for about half the New York-based company’s revenue last year and has countered a slump in trading, which fell for a fourth straight period in the second quarter.

JPMorgan joins rivals including Wells Fargo & Co. in cutting the outlook for traditional lending businesses that have benefited from higher rates, which they passed on to borrowers while holding deposit rates low. Fed Chairman Jerome Powell last week opened the door to a July cut in interest rates, citing a cooling global economy and trade friction. It’s a reversal from the start of the year, when investors were betting the Fed would boost rates.

Chief Executive Officer Jamie Dimon said worsening prospects for interest income won’t affect the bank’s expansion and investment plans.

“NII is like the wind blowing,” Dimon said on a call with journalists. “We’re opening branches, that is not the wind. That is serious expansion of business -- of course we can’t predict the future any better than you can.”

Jennifer Piepszak, speaking publicly for the first time in her new role as chief financial officer, said net interest income might decline by as much as $150 million in the third quarter compared with the previous quarter, assuming the Fed cuts interest rates three times this year. She said the number could fall by more than that in the last three months of the year.

JPMorgan notched the highest profit in U.S. banking history in 2018, at $32.5 billion, spurred in part by rising interest rates and the Trump administration’s corporate tax cuts. The bank now sees net interest income at about $57.5 billion this year after saying in April it could increase to more than $58 billion.

JPMorgan’s Lending Outlook Suffers From Fed’s Rate Reversal

Shares of the company, which climbed 17% this year through Monday, fell 0.3% at 9:49 a.m. in New York trading.

Wells Fargo & Co. said Tuesday that its net interest income fell to the lowest level since 2016. At Citigroup Inc., net interest revenue increased 2% in the second quarter, the bank said Monday as it left its full-year growth outlook for the figure unchanged at 4%.

JPMorgan’s revenue from stock and bond trading slipped 6% in the second quarter, excluding a one-time gain related to the initial public offering of Tradeweb Markets Inc. Analysts had expected a 5% drop. Fees from underwriting stock and bond offerings and advising on mergers fell 14% to $1.85 billion.

Revenue from the corporate and investment bank slipped 3% from last year’s record to $9.6 billion as market uncertainty drove investors to the sidelines and damped corporate sentiment.

Non-interest expense rose by 2% to $16.3 billion in the quarter, less than the average analysts’ estimate of $16.4 billion. The bank said in February that adjusted expenses for the full-year would rise to less than $66 billion from about $63 billion last year.

JPMorgan has been ramping up spending as it expands its consumer bank into new states for the first time in more than a decade, uses technology to transform how its corporate and investment bank does business, and constructs a new headquarters in New York.

Other insights from the report:

  • The firm’s consumer bankers continue to outperform their Wall Street counterparts, posting a 22% increase in net income in the quarter. Dimon said the bank continues to see positive momentum with the U.S. consumer, citing “healthy confidence levels, solid job creation and rising wages.”
  • The bank said that while its rates-trading business held up well during the quarter, there was reduced client activity in equity derivatives and weakness in the fixed-income EMEA business.
  • Net charge-offs at the bank increased to $1.4 billion from $1.3 billion last year.

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