JPMorgan’s 3Q offers glimpse of big questions facing banking

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The upbeat third quarter at JPMorgan Chase — including a 9% gain in net interest income to a company record $13.9 billion — was a timely confidence booster for investors worried about the ill effects of rising interest rates and bankers concerned about persistent sluggishness in loan demand.

But perhaps more interesting — and less comforting — than the quarterly results were the questions they prompted about the future of the industry. During a conference call with analysts, CEO Jamie Dimon and Chief Financial Officer Marianne Lake were pressed for answers on some of the underlying trends that have raised doubts about the industry’s profitability in the years ahead.

Among them were: Where is revenue growth going to come from if banks have to keep making big investments in technology? Are big banks’ hands tied in commercial lending by capital and other post-crisis requirements? And is the economy on the brink of a downturn?

Analysts pointed out that after JPMorgan’s string of recent product announcements, including the creation of an all-digital bank for millennials, as well plans for a splashy retail expansion along the East Coast, expense growth (about 7% from the prior year) outpaced growth in revenue (just over 5%) on a managed-accounting basis.

Lake emphasized that JPMorgan has recently capitalized on opportunities to expand its market share. Still, she said, she does not expect the sharp run-up in costs to continue for long.

“We have identified the opportunity to accelerate capabilities that are consistent with our clients’ strategic long-term goals, so we’ve been leaning into that this year,” Lake said during the call, noting that the company reported a “pretty sizable step-up” in its business investments.

“Acknowledging that,” Lake continued, “we shouldn’t necessarily expect to see that continue, but we’re going to carry on investing in technology, adding bankers, opening branches [and] launching new products so that we’re sort of defending the long-term growth and profitability of the company.”

Lake reiterated the company’s expectations to maintain an efficiency ratio in mid-50% range in the years ahead. As of Sept. 30, that metric was 57%.

Questions about the industry’s future profitability come amid a market sell-off over the past two days, which drove the Dow Jones industrial average and S&P 500 to their steepest one-day declines in eight months.

The stock-market decline coincided with an increase in long-term rates, as the 10-year Treasury hit 3.14%, its highest level in seven years. Dimon, notably, has recently predicted that yields on 10-year Treasury notes could soon hit 5%.

“When I talk about 5%, I’m talking about possibilities, that people shouldn’t rule that out,” Dimon said. He also said that the economy “is very strong.”

Overall loan growth was solid at JPMorgan, as average core loans — excluding those made in the corporate and investment banking division — rose 6% from a year earlier to $425.9 billion.

Still, the New York company faces the same pressure that is weighing on other big banks: anemic demand for business loans. Commercial loans dipped 1% from June 30, with the largest declines coming from middle-market and corporate customers.

“In C&I, demand remains muted in the wake of tax reform,” Lake said, suggesting that the excess cash that commercial customers received from the tax cut has reduced their appetite for bank debt.

Lake also said that competition from private-equity firms and other nonbanks continues to intensify.

“It’s definitely true that nonbanks are gaining share, and it’s also true that they are, structure-wise, going to be willing and are willing to do things that we’re not,” she said.

Still, as big banks remain stuck in a commercial lending slump, with no apparent end in sight, smaller banks continue to outpace their peers, particularly in terms of commercial loan growth, according to recent data from the Federal Reserve.

During the call, Gerard Cassidy, an analyst with RBC Capital Markets, asked Lake if one of the reasons for the difference is that big banks are constrained in any way by the conservative underwriting standards imposed by banks since the Fed began its annual comprehensive capital analysis and review process after the financial crisis.

Lake said that all banks have their own business mix and appetite for risk. Still, she said, JPMorgan, like other big banks, is “increasingly bound by standard risk-weighted assets” and faces pressure to keep the quality of its loan book pristine.

“On some level, we have to generate a positive return and shareholder value,” Lake said. “And on these very high-credit-quality loans that we’re producing, it’s expensive.”

JPMorgan executives weren’t the only bankers to get questions Friday about expense control, lending prospects and other worrisome topics.

Bill Demchak, chairman and CEO of PNC Financial Services, was asked about the Pittsburgh company’s run-up in noninterest expenses; they rose 6% during the third quarter from a year earlier, to $2.6 billion, due largely to compensation costs.

“It would be a real mistake, in my view, to slow down and stop our investments,” Demchak said on the $380 billion-asset company’s quarterly conference call Friday morning. Demchak noted that PNC has recently increased its minimum wage and launched a digital-only bank.

Meanwhile, PNC’s strong commercial loan originations in the third quarter were offset by pay-downs, payoffs and lower credit line utilizations, Demchak said. He offered several explanations: Many companies are still flush with cash from tax cuts, while others are refinancing with nonbank lenders or going to those lenders for financing in the first place.

Asked what it would take to revive commercial loan growth to a level more consistent with the strength of the economy, he replied: “I don’t know how to forecast for that.”


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