JPMorgan's Loan Business Notches Record Going Back-to-Basics

(Bloomberg) -- The biggest U.S. bank leaned on old-fashioned lending in the third quarter to weather a slump in fixed-income trading.

JPMorgan Chase & Co. said net interest income -- revenue from customers’ loan payments minus what it pays depositors -- jumped to a record $13.9 billion in the period, helped by rising interest rates and steady growth in what the bank considers core loans. Bond-trading revenue fell 10 percent.

JPMorgan’s core-loan book expanded 6 percent, excluding the investment bank, even as it faced stiffer competition from non-traditional lenders and as rising interest rates sapped demand for some types of borrowing, including mortgages. Some companies borrowed to fund growth plans in the wake of President Donald Trump’s tax cuts. Before the report, analysts had predicted loans would only increase 2 percent for the four biggest U.S. money-center banks.

The increase in NII put the New York-based lender on pace to meet more optimistic guidance set by Chief Financial Officer Marianne Lake at an investor conference in September, when she said the bank could generate $55.5 billion of net interest income in 2018. That was a boost from the $55 billion she forecast in February.

Shares of the bank, up 1.1 percent this year through Thursday, advanced 1.9 percent to $110.16 at 9:32 a.m. in New York.

Analysts have warned that bank profits could be nearing their peaks as the benefits of lower taxes, declining legal bills and rising interest rates start to fade. Charles Peabody at Portales Partners cut his recommendation on JPMorgan to sell from neutral Wednesday, citing the possibility of falling revenue, higher credit costs and weaker shareholder returns in 2019.

Dimon’s List

Chief Executive Officer Jamie Dimon said the expanding list of geopolitical and economic uncertainties raises the risk that one of them will hurt the economy. He pointed to escalating trade skirmishes, rates rising faster than expected, Brexit, Italian sovereign-debt problems, rising tensions with Saudi Arabia and higher mortgage rates, among other events that could take a toll on global and U.S. growth.

“There’s eight or nine things out there,” Dimon said on a call with journalists, adding that he’s seeing a bit of deterioration in the outlook. “In general those things don’t necessarily derail the U.S. economy, but they are all out there. No one should be surprised if it happens down the road.”

While the bank benefited from higher interest rates, it did pass some of that on to some of its customers. The interest-earning deposit rate, how much the lender pays for deposits, almost doubled to 0.61 percent from 0.32 percent last year. Still, Lake said on a call with analysts that most of the increase went to companies and wealthier individuals, since the bank hasn’t yet felt pressure to offer higher rates to most consumers.

The bank’s net interest income beat a previous record of $13.8 billion set in the fourth quarter of 2008. On an adjusted basis, it was $14.1 billion, surpassing the $14.03 billion average estimate of six analysts surveyed by Bloomberg. The amount the bank set aside for bad loans was $948 million, less than the $1.46 billion analysts expected.

While other lenders have expressed some caution on consumers’ ability to pay back debt, JPMorgan reduced its reserve for losses in that business. Less than 1 percent of the bank’s home and auto loans were delinquent, and charge-offs in the consumer unit dropped 11 percent.

“Who said credit costs couldn’t go any lower?” Susan Katzke, an analyst at Credit Suisse Group AG, said in a note reacting to the figures.

Trading revenue of $4.4 billion was helped by a 17 percent jump in equity trading. Fixed-income trading revenue of $2.84 billion fell short of analysts’ estimates.

Lake said in September that third-quarter trading revenue would decline from the same period a year earlier. JPMorgan said Friday the drop in fixed-income trading revenue reflected weakness in its rates and credit-trading businesses.

While Dimon said the next downturn could be triggered by borrowing costs increasing faster than expected, he said higher interest rates would probably benefit the bank’s trading business.

“Trading is usually enhanced by more volatile markets and rising rates probably causes a little more volatility,” Dimon said. “Obviously you have to be good trader to benefit from that.”

To contact the reporter on this story: Michelle F. Davis in New York at mdavis194@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steve Dickson, Daniel Taub

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