Bank investors look beyond trading revenue to deliver strong gains

Last week, bank stocks posted their strongest five-day gains in more than two years.

  • By Telis Demos,
  • The Wall Street Journal
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Wall Street trading desks had a horror-show fourth quarter that dragged on bank results. But investors in big-bank stocks focused instead on gains in lending businesses and improving sentiment around the U.S. economy.

The result: last week, bank stocks posted their strongest five-day gains in more than two years. The KBW Nasdaq Bank index (.BKX) rallied 7.7%, the best one-week rise since the 2016 presidential election. That has erased a big chunk of steep losses suffered amid fourth-quarter market tumult.

Those late 2018 declines were sparked by uncertainty over the path of Federal Reserve rate increases, worries around the U.S.-China trade dispute and fears the U.S. economy could slip into recession in coming months. The selloff became so pronounced that it sparked a surprise statement of support for banks from Treasury Secretary Steven Mnuchin, a move that ended up rattling investors further.

In fourth-quarter results posted last week, however, big banks didn’t show signs of lasting damage. While market volatility hurt trading desks, causing some banks to miss earnings and revenue targets, those same banks continued to report a lift from higher interest rates.

This fueled further gains among banks, whose shares had been rising along with broader markets in 2019. The KBW index is now up more than 20% since its recent Dec. 24 nadir.

The bounce back has been particularly pronounced among the banks that suffered the most. Citigroup Inc. (C), for example, fell nearly 30% in the fourth quarter of 2018. This year, it is up more than 20%.

Its big-bank peers— JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC)—followed a similar pattern, even if their moves were somewhat less pronounced. All three fell more than 10% in the fourth quarter; this month they have risen between 7% and 19%.

Fourth-quarter results helped assuage some worries. The banks, for example, showed scant signs of being stressed by lending to consumers or companies. The latter is a particular worry for some analysts, given that corporate debt represents as big a share of gross domestic product as at any time since the 2008 financial crisis.

JPMorgan, for instance, said it did reserve more against possible losses on “select” commercial and industrial clients. But the bank described those as idiosyncratic situations and not reflective of any broader laxity in lending.

“There’s nothing to see right now in our portfolios, and we’re looking,” JPMorgan CFO Marianne Lake told analysts.

Overall, the four big banks and several regional banks that reported last week collectively increased business loans by around 3.8% from the third quarter, the fastest quarter-over-quarter pace since 2012, according to analysts at Autonomous Research, a stock-research firm. Consumer credit-card spending and lending at those banks also grew.

Banks also forecast continued gains from higher rates, even if the Federal Reserve raises rates only once in 2019. Citigroup, for example, said it would earn about $2 billion more from higher rates in 2019, about the same amount of income added in 2018.

Fears receded on other fronts as well. At Citigroup, investors had grown jittery late last year about the bank’s international exposure, given trade-war talk and worries about a slowdown in China.

Adjusted for changes in currency rates, core consumer-banking revenue in Latin America and Asia still grew, and the treasury and trade services business grew 11% from a year ago.

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