WRAPUP 1-Consumer credit casts cloud over JPMorgan and Citi

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NEW YORK (Reuters) – JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N) on Thursday said they had set aside more money for credit card lending losses in the third quarter, stoking concerns about consumer indebtedness and overshadowing profits that topped analyst estimates.

Wall Street has ramped up credit card lending amid a slump in bond trading, once a growth engine for many banks, but the higher provisions for bad debts fueled worries about the future profitability of an already costly business and sent shares in both banks lower.

Provisions for credit losses across JPMorgan rose 14 percent, with the bank attributing much of that to its credit card business, and 15 percent at Citi in the quarter compared to a year ago.

Both banks said that the increases were a normal part of the credit cycle and did not point to evidence of consumers under stress, but that explanation did not reassure analysts.

“Investors are taking exception to both companies adding to their credit card loan reserves,” said Jason Goldberg, analyst at Barclays.

Citi shares were down 3 percent and JPMorgan was off 0.8 percent in afternoon trade.

U.S. banks have spent hundreds of millions of dollars attracting consumers to their credit cards with offers of cash-back on spending, plane tickets and free borrowing on balances transferred from other cards.

Analysts on Citi’s earnings call questioned when the incentives would end and investors would start to see a return.

“In general, the promotional balances, while a range of offers vary, they do go up to 21 months … Don’t freak out. It doesn’t mean it’s going to be 21 months before we see growth in anything,” Chief Financial Officer John Gersprach told analysts.

At Citi, cost-cutting, a unit sale and a gain in investment banking fees helped the fourth-biggest U.S. bank beat Wall Street expectations for both profit and revenue.

FILE PHOTO: A view of the exterior of the Citibank Corporate headquarters in the Manhattan borough of New York City, May 20, 2015. REUTERS/Mike Segar/File Photo

JPMorgan, the largest U.S. bank by assets, also topped expectations as loan growth and higher interest rates more than offset a 27 percent slide in bond trading.

GREATER CLARITY NEEDED ON TAX

For most of the past seven years, Wall Street banks have been grappling with low bond market volatility and new regulations that have restricted certain activities and made trading more expensive. Banks are looking to growth in loans to help offset the trading slump.

Hopes are fading that U.S. President Donald Trump will be able to stimulate bond trading activity and boost demand for loans through a yet-to-materialize tax overhaul and loosening in financial regulations.

“We all would anticipate greater loan growth if there was a bit more clarity as far as you know when or if tax reform was going to pass,” Gersprach said.

JPMorgan fared worse last quarter than rival Citi, which reported a 16 percent decline in bond trading.

And the trend bodes poorly for Goldman Sachs Group Inc (GS.N), which has recently struggled more in that area than other Wall Street banks. It will report third-quarter earnings on Tuesday.

JPMorgan’s markets revenue is likely to drop again in the fourth quarter because the year-ago period was strong, Chief Financial Officer Marianne Lake said on a conference call with analysts.

Executives maintained earlier guidance for full-year net interest income, expenses, charge-offs and loan growth, indicating that they expect JPMorgan’s other businesses to continue to offset capital markets pain.

Bank of America Corp (BAC.N) and Wells Fargo & Co (WFC.N), the second- and third-biggest U.S. banks by assets, are due to report results on Friday.

Additional reporting by Sinead Carew in New York; Writing by Carmel Crimmins; Editing by Meredith Mazzilli