Amid a bleak interest rate environment and fears that it could get far worse, some large banks have shown that balance sheet growth, control over expenses and diversified revenue streams can serve as powerful buffers.
Nevertheless, net interest margins continued to grind lower at each of the four largest U.S. banks in the third quarter, and while credit losses remain light, none of the available offsets appears strong enough to fully counter the rate headwinds.
Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. each posted double-digit growth in normalized earnings per share compared with the year prior, although the performance reflects the large amounts of stock the companies are buying back.
Ahead of third-quarter reports, investors and analysts were braced for damage to margins, and many banks have indeed posted substantial compression. But, at least for now, the rate picture has eased since banks gave downbeat mid-quarter updates, as Federal Reserve cuts and a recovery in long-term yields have produced a slightly more hospitable curve.
JPMorgan Chase and BofA did stand out for managing the rate environment relatively well, and both companies beat consensus EPS forecasts by more than 9%.
JPMorgan Chase's guidance that it would generate a bit under $57.5 billion of net interest income in 2019 brought it back into line with the forecast it gave in July, before the Fed's first rate cut. The bank said the rebound in 10-year Treasury yields since early September had improved its outlook and that it would have a solid base to build on if continued growth in deposits enables it to expand its balance sheet.
BofA stuck to its July guidance that net interest income could increase 1% in 2019 compared to the year prior. "We've managed better than we thought we could," Chairman and CEO Brian Moynihan said on the company's earnings call. The bank said loan and deposit growth and lower deposit costs were counterbalancing factors like declining yields on floating-rate assets.
Still, the drop in BofA's NIM in the third quarter — by two basis points from the second quarter — was its third consecutive quarterly decline. JPMorgan Chase's NIM also fell for the third consecutive quarter, and Citi's fell for the fourth consecutive quarter.
Wells Fargo & Co.'s NIM took the biggest tumble, dropping 14 basis points from the second quarter and 28 basis points from the year-ago period. The bank has forecast that its net interest income would decline 6% in 2019 from the year before, and it projected that the descent will continue in 2020, though possibly at a slower pace.
For most of the big banks, expenses appear to remain under control overall, with third-quarter efficiency ratios declining from the second quarter at BofA, Citi and JPMorgan Chase. The banks have advised that they will not scrimp on spending for key technologies and long-term growth, however.
BofA reported that its operating leverage, a relatively informal measure of the difference between the year-over-year growth rates in revenues and expenses, fell to zero in the third quarter.
"We are going to invest for long-term value of this company and our clients," Moynihan said. He noted that revenue growth has been hampered by a possibly transitory turn in the interest rate environment, and he argued that allowing operating leverage to go negative could be the right thing to do.
"Our attitude in talking to our investors is, if we're gaining share and doing the right things, keep going," he said.
Wells Fargo continues to struggle with expenses, driven in part by ongoing efforts to build up its risk management and regulatory compliance capabilities, a reaction to an extensive series of consumer abuse scandals.
In its third-quarter report, executives once again declined to provide specific guidance on expenses in 2020 and beyond, saying that it will be up to new CEO Charles Scharf to lead a comprehensive strategic review.
Along with revenue-related pressure impacting the denominator, Wells Fargo's efficiency ratio jumped 329 basis points from the second quarter to 66.87%, a level about 10 percentage points higher than its universal bank peers.