The earnings and loss statements of the nation’s largest banks this week should show a robust Wall Street recovery and an endless appetite for investment banking.
JPMorgan Chase and Goldman Sachs kicked off their round of bank earnings reports this quarter with better-than-expected results. The high numbers were bolstered by the release of some funds that banks delayed when Covid-19 first swept the country.
“Even if growth peaks and begins to slow, it is likely to remain robust until at least 2022,” said Jeff Mills, chief investment officer at Bryn Mawr Trust. “People are in the best shape.”
Bank of America, Wells Fargo, Citigroup and Morgan Stanley will also report earnings later this week.
Chase Chairman and CEO Jamie Dimon described the consumer outlook as bright in a report. “Consumer and wholesale balances remain exceptionally strong as the economic outlook continues to improve,” he said, noting “the healthier state of our customers and customers.”
Debit and credit card spending rose 45 percent, which is unsurprising given the plight of the U.S. economy in the second quarter of 2020, but Daimon said that recovery also eclipsed the same quarter of 2019, growing 22 percent.
Goldman Sachs’ earnings were bolstered by the power of a seemingly limitless investor appetite for an IPO. Likewise, Dimon said that investment banking fees at Chase hit a record $ 3.6 billion, up 25 percent.
Another factor driving this number up is that large banks are releasing some of the loan loss provisions they accumulated at the start of the pandemic, waiting for a wave of defaults on loans, mortgages and loans that never happened. As banks free up this money, it increases their profits, and Wall Street analysts have already accounted for this temporary effect.
“We expect the remainder of these reserves to be released through profit over the next few quarters. As a result, overall earnings should look good for banks, ”said Mike Mayo, senior banking analyst at Wells Fargo.
For the market, the big question is what will happen next. This week, investors are listening to bank executives characterize economic activity as they look forward to it.
“He will pay more attention to management in the future, especially in terms of credit growth,” said David Wagner, portfolio manager at Aptus Capital Advisors. “The demand for loans is still quite low … Consumers are still full of cash and many companies have not spent capital.”
However, the pandemic remains an ongoing threat. “We must always be on the alert. The delta option is definitely a risk, ”said Jeff Buchbinder, equity strategist at LPL Financial. “The last thing we want to see is more blocking.”
However, Buchbinder added that current conditions give the market reason to remain optimistic. “We do not expect any widespread economic shock in the near future,” he said.
Goldman Sachs CEO David Solomon also noted in the company’s earnings report that the market has yet to settle down on Covid-19. “As the economic recovery continues, our clients and communities still face challenges in overcoming the pandemic,” he said.
The boom in the housing market has sparked perhaps inevitable comparisons to the 2008 market crash and the real estate crisis, but analysts say the underlying fundamentals have changed this time around. “This is day and night compared to the last recession,” Mayo said. “The last recession, banks were the cause of the problem and the source of weakness.” Now, he said, “banks were a source of support for the economy and a source of strength.”
“People are in the best shape. The housing market is a great example of this. We saw a revival there, but lending standards have remained relatively conservative, especially compared to 10 years ago, ”Mills said.
The muscular regulatory response following the Great Recession, although it was often criticized by banks in subsequent years, could have been an invisible shield against disaster.
“Kudos to the banking regulator a decade ago for strengthening the bank fund,” Mayo said. “The banks were strong enough before the pandemic to survive.”