After setting aside billions of dollars for defaults that never happened, banks are recording windfall profits. . . .
This week’s earnings reports from the nation’s major banks are on track to show a solid and continued recovery for Wall Street – and a boundless appetite for investment banking.
JPMorgan Chase and Goldman Sachs launched the series of banking results this quarter with better than expected results. The strong numbers were boosted by the release of some of the funds banks had put aside when Covid-19 first swept the country.
“Even though growth has peaked and is starting to slow, it is expected to remain robust until at least 2022,” said Jeff Mills, chief investment officer for Bryn Mawr Trust. “People are in better shape.”
Later this week, Bank of America, Wells Fargo, Citigroup and Morgan Stanley will also release their results.
Chase President and CEO Jamie Dimon called the consumer outlook pink in the report. “The balance sheets of consumers and wholesalers remain exceptionally strong as the economic outlook continues to improve,” he said, noting “the increasingly healthy condition of our customers and customers.”
Spending on debit and credit cards rose 45%, not surprisingly given the moribund state of the US economy in Q2 2020, but Dimon said that rebound also eclipsed the same quarter in 2019, up 22%.
Goldman Sachs ‘returns were supported by the strength of investors’ seemingly limitless appetite for IPOs. Likewise, Dimon said investment banking fees at Chase hit a record $ 3.6 billion, a 25 percent increase. .
Another factor that is increasing the number is that the big banks are releasing some of the loan loss reserves they accumulated at the start of the pandemic, anticipating a wave of loans, mortgages and credit defaults that did not. never happened. As banks release that money, it increases their bottom line, a transient effect, analysts say, that Wall Street has already built into the price.
“We expect the remainder of these reserves to be released through earnings over the next few quarters. The result is that earnings should look favorable for the banks, ”said Mike Mayo, senior banking analyst at Wells Fargo.
For the market, the big question is what comes next. Investors are listening this week to how bank executives characterize economic activity as they look to the future.
“He will be looking more into management’s direction for the future, particularly with regard to loan growth,” said David Wagner, portfolio manager at Aptus Capital Advisors. “The demand for loans is still quite low… Consumers still have plenty of cash and many businesses haven’t spent any capital. “.
However, the pandemic remains a persistent threat. “We always have to be careful. Certainly the delta variant is a risk, ”said Jeff Buchbinder, equity strategist for LPL Financial. “The last thing we want to see is more lockdowns. “
Buchbinder added, however, that current conditions give the market reason to remain bullish. “We don’t expect some sort of general economic shock anytime soon,” he said.
Goldman Sachs CEO David Solomon also noted in the company’s earnings release that the market cannot yet be satisfied with Covid-19. “While the economic recovery is underway, our customers and communities still face challenges in overcoming the pandemic,” he said.
The high-flying real estate market has drawn perhaps inevitable comparisons to the 2008 stock market crash and the housing crisis, but analysts say the underlying fundamentals are different this time around. “It’s night and day compared to the last recession,” Mayo said. “The last recession, the banks were a cause of the problem and a source of weakness.” Now, he said, “the banks have been a source of support for the economy and a source of strength.”
“People are in better shape. The housing market is a good example. We saw a fervor there, but the lending standards have remained relatively conservative, especially compared to what they were 10 years ago, ”Mills said.
A tough regulatory response after the Great Recession, though often criticized by banks in the years that followed, could have been the invisible shield that protected them from disaster.
“Kudos to the banking regulators ten years ago for upholding the foundation of banks,” Mayo said. “The banks were in a sufficiently solid state before the pandemic to be able to survive. “