NEW YORK — Surging U.S. Treasury yields weighed on third-quarter results at Wall Street's largest banks, where weak bond trading undercut otherwise solid performances. Investors are now watching the Federal Reserve for signs of further tightening, on expectations that a steep climb in global oil and U.S. diesel prices in September pushed consumer price inflation higher.
Most of the large U.S. banks that opened earnings season on the 13th reported disappointing results in bond trading. JPMorgan Chase, the country's largest bank, posted revenue of $50.91 billion and earnings per share of $5.57, falling short of market estimates of $51.22 billion and $5.90. The miss was unusual for a bank that has beaten EPS expectations in 16 of the past 20 quarters.
The shortfall stemmed from bond trading, where falling prices left revenue below expectations. Fixed-income trading revenue came in at $5.4 billion, missing forecasts by $550 million — a wider gap than the $310 million by which overall revenue fell short. Total expenses reached $27.3 billion, $90 million above estimates. Revenue rose just 8% from a year earlier while costs climbed 12%.
Wells Fargo also disappointed investors, reporting third-quarter revenue of $21.87 billion against estimates of $22.3 billion. EPS of $1.87 barely topped the $1.85 consensus. Bond trading revenue of $1.26 billion fell well short of the $1.41 billion expected, down 7% from a year earlier and 18% from the previous quarter. Equity trading revenue rose 21%, but much of that gain was offset by the decline in fixed income.
Goldman Sachs fared better, posting third-quarter revenue of $18.68 billion and EPS of $17.01, beating estimates of $16.4 billion and $13.50. Equity trading revenue jumped 72% from a year earlier to $6.44 billion, more than four times the $1.42 billion analysts had expected. Even so, Goldman's bond trading revenue slipped about 1% from a year earlier to $3.47 billion, missing estimates by $239 million.
Citigroup reported third-quarter revenue of $23.85 billion and EPS of $2.85, above estimates of $23.72 billion and $2.66. Broad-based growth across most business lines delivered the bank's highest third-quarter revenue in a decade. Still, bond trading revenue rose only 4% from a year earlier to $4.4 billion, lagging growth in equities trading (14%), services (15%), investment banking (9%) and wealth management (15%).
Investors judged that the banks' solid results were not enough to dispel concerns about bond market instability, prolonged high interest rates and uncertainty in fourth-quarter equity markets. The 10-year U.S. Treasury yield, the global bond market benchmark, topped 5.3% earlier this month, the highest in 24 years since May 2002. Shares of JPMorgan (-0.86%), Wells Fargo (-3.10%), Goldman Sachs (-0.23%) and Citigroup (-5.60%) all fell more sharply on the day of their earnings releases than the S&P 500 (-0.02%), the Nasdaq (-0.15%) and the Philadelphia Semiconductor Index (-0.23%).
Compounding the pressure, Bank of America was fined $1.2 billion by the U.S. Treasury Department the same day for allegedly failing to act on suspected Chinese money laundering networks and suspicious financial transactions along the southern U.S. border. In a statement, the bank said it had committed billions of dollars and thousands of staff to combating financial crime, and that the penalty would reduce third-quarter EPS by 17 cents.
With bond market volatility pressuring bank profitability, market participants are focused on the timing of any further Fed tightening. Economists expect the September consumer price index, due from the U.S. Labor Department on the 14th, to show inflation of 3.6% from a year earlier, up from 3.4% in August.
New York Federal Reserve President John Williams, considered a dove within the central bank, said in an interview with Bloomberg that further rate increases next year would likely not be necessary. JPMorgan Chief Executive Jamie Dimon warned the same day that a one-percentage-point rise in interest rates would be more painful.