Loan Growth Slowdown Hurts Some Banks More than Others

Strong investment banking operations helped J.P. Morgan and Citigroup weather a slowdown in lending, but not Wells Fargo

By Aaron Back

Wells Fargo said the growth of average quarterly loans slowed to 4% in the first quarter from 6% in the fourth quarter. Photo: brendan mcdermid/Reuters


The split between solid performance on Wall Street and a slowdown in lending growth is turning some banks into winners and others into laggards.

First quarter net income rose by 17% from a year earlier at both J.P. Morgan Chase JPM -0.56%▲ and Citigroup , C -0.59%▲ beating analyst estimates in both cases, thanks to strong investment banking and trading activity. Wells Fargo WFC -2.50%▲ saw flat net profit as loan growth slowed and expenses swelled in the aftermath of its account sales scandal.

The banks gave more details around a sudden slowdown in loan growth that has been showing up in Federal Reserve data and has caused concern and confusion among economists.

At J.P. Morgan Chase, total loans outstanding at the end of the first quarter rose 6% from a year earlier, a slight deceleration from 7% growth at the end of last year. In the first quarter of 2016, J.P. Morgan’s overall loan growth was a much stronger 11%.

The company also said that average commercial and industrial loans in the quarter increased 8% from a year earlier, though Chief Financial Officer Marianne Lake said this still represents a deceleration.

At Citigroup, loans grew by 8% from a year earlier in its global consumer operations, and by 3% at its corporate bank.

One explanation for weakening loan growth could be that companies are raising money in capital markets instead of borrowing from banks. Ms. Lake said capital markets were “wide open.” She also said there were fewer big, debt-financed M&A deals in the first quarter, which could have contributed some “noise” to the Fed’s data.

J.P. Morgan Chief Executive James Dimon cited other factors as well for the slowdown, including higher mortgage rates and slowing auto sales. But he told analysts not to “overreact” and expressed confidence in the overall economic picture in the U.S.

Universal banks like J.P. Morgan and Citigroup may be more resilient than others to a lending slowdown. They can make money from big companies whether they raise money through loans or capital markets. Smaller regional banks, which will report earnings over the coming weeks, may feel a harsher impact.

Wells Fargo, which acts more like a regional bank because it lacks a big investment-banking operation, said the slowdown is an industry trend. The bank said growth of average quarterly loans slowed to 4% in the first quarter from 6% in the fourth quarter. The company cited a number of factors, including declining mortgages and the bank’s own tightening of standards in auto loans. Costs are still rising as the company tries to dig its way out of the account sales mess.

Citigroup and J.P. Morgan both got big boosts from equity and debt underwriting. Wells Fargo was the loser of the day, and it is also the most expensive of the three, trading at 1.5 times book value.

The outlook for banking shares overall remains positive, but there is no compelling reason to hold this one.

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