NEW YORK (AP) — So far, it appears 2019 was another record year for Wall Street.
Trading of stocks and bonds rebounded after a terrible end to 2018 and consumers spent tons of money on their credit cards, buoyed by a strong job market and steady economic growth. On Tuesday, JPMorgan Chase reported a record annual profit, while Citigroup posted its best results since before the Great Recession.
“Given record-high equity prices, very low unemployment, a growing economy at about 2%, a stable US dollar, and positive developments in trade, it is not surprising to see the results that are coming in,” said Mark Doctoroff, global co-head of the Financial Institutions Group at MUFG. “Net interest margins may be suffering because of interest-rate cuts, but the consumer businesses and the trading results, combined with solid investment and wholesale-banking earnings, are making this a good year.”
The biggest concern going forward is that lower interest rates will slow down Wall Street’s decade-long profit party. The Federal Reserve cut interest rates three times in 2019, each time by a quarter of a percentage point. That’s started to cut into bank’s interest income — the difference between what a bank charges for loans and what it pays out on deposits — which has been a major profit driver in the last couple of years.
The improved results at JPMorgan and Citigroup were partly attributed to a surge in trading revenue. In late 2018, plunging stock markets and fears of a possible recession weighed on bank profits in the final quarter. In 2019, the Fed's rate cuts and a “phase one” trade agreement between China and the U.S. helped alleviate recession fears. Revenue from trading jumped 55% at JPMorgan and 49% at Citi in last year's fourth quarter.
The banks' other businesses did well, but lower interest rates were a hurdle. JPMorgan Chase’s net interest revenue fell 2% while the same metric at Citigroup fell 1%.
Wells Fargo also reported quarterly earnings Tuesday. Its results are messy due to the fact the bank is mired in unending legal troubles and is restrained from growing its business by the Federal Reserve. The bank took a $1.5 billion charge last quarter to cover its legal costs. Even setting aside the legal issues, things do not look good for Wells Fargo, which is more susceptible to fluctuations in interest rates because of its large consumer banking business. It saw interest revenue fall 8%.
Bank executives say that the U.S. economy is healthy and growing steadily, and the American consumer is spending and borrowing with confidence, which should keep bank profits healthy in 2020. The biggest challenge could be lower interest rates, as the Fed has signaled it intends to keep rates steady for the foreseeable future.
“Lower interest rates make it a lot harder to grow profits from here,” said Kyle Sanders, an analyst with Edward Jones who covers Wells Fargo. “A lot of things have to go the right way to keep this earnings momentum for the banks."
But other analysts say that if banks continue to cut costs to make up for falling interest rate revenue, and the U.S. economy keeps growing steadily, banks could have another highly profitable year in 2020.
The rest of the Wall Street banks — Goldman Sachs, Morgan Stanley and Bank of America — will report later this week as will a host of regional banks such as PNC, U.S. Bank, and Truist, the new bank created by the merger of BB&T and SunTrust.