As revenues from large banks flow in, analysts and investors may have to continue to wait for substantial lending growth, which will lead to higher net interest income (NII) and therefore higher profits. This is not surprising given that bank executives spoke at industry conferences in the second quarter.
Banks are witnessing a recovery in spending, but this has not yet led to a significant increase in loans. Consumers are full of savings cash and incentives, and businesses are still not ready to pull the trigger on new spending on inventories and other investments.
Despite the delay Bank of America (NYSE: BAC) sees promising signs of accelerating credit growth in the second half of the year and management is also optimistic.
What Happened to Credit Growth in Q2
In the second quarter, Bank of America posted a 2% increase in end-of-period loans compared to the first quarter of 2021 to approximately $ 916 billion. But average borrowing and leasing, which is largely the driving force behind R&D, has not changed since the first quarter of the year. The research institute has also not changed since the first quarter of the year.
Several bright spots were mixed with the lack of growth. First, both the average loan balance and loan balance at the end of the period did not change or increased even though PPP loans were forgiven and these balances decreased in the quarter. Moreover, bank saw commercial, credit cards and home mortgages start to rise in the second quarter.
Loans to Bank of America’s global markets division jumped 14% from the first quarter, while loans to the bank’s global asset and investment management division rose 4% from the first quarter. But the bad news is that the use of commercial lines of credit remains very low, and consumers continue to repay their loans ahead of schedule at high rates. Long-term interest rates – for example, on the 10-year Treasury bill, which is associated with the profitability of many loans – also fell in the second quarter, falling to the net interest rate.
The good news is that Brian Moynihan, CEO of Bank of America, said that while inconsequential, almost all of the bank’s various divisions saw some credit growth. Moynihan also said that he doesn’t think line usage on the commercial side could actually decline as it is still in the lower 30% range, which is 10% lower than the line normally used in some segments. In business banking, which serves a company with annual revenues of between $ 5 million and $ 50 million, Moynihan said loans are finally growing in net terms after being stuck for several quarters.
Another good news is that Bank of America management also successfully predicted that the net interest rate would hit a low in the third quarter of 2020. Although the bank still expects more substantial growth, it managed to maintain its net interest rate despite significant volatility. and lower long-term rates.
Finally, despite the difficulties associated with long-term rates, management has not abandoned its full-year net interest rate forecast. Moynihan said in the first quarter that some modest credit growth and continued improvement in long-term rates and an increase in the steepness yield curvein which long-term interest rates rise and short-term interest rates remain low, could result in a $ 1 billion increase in net interest rates from $ 10.3 billion received by the bank in the first and now in the second quarters.
Bank of America CFO Paul Donofrio said that while the target is more difficult to achieve now, it is still possible if loans continue to rise and long-term rates do not drop from here. Donofrio added that the bank may decide to inject additional excess liquidity into securities to help this mission.
Unlike, JPMorgan Chase has already cut its net income forecast for the year from $ 55 billion to $ 52.5 billion, although the bank has made it clear that it is accumulating cash and not reinvesting in securities at such low rates.
While everyone would like to see more credit growth in the second quarter, I am somewhat optimistic about what we have seen with credit growth at Bank of America during the quarter and management sentiment. Loan prepayment rates should decline and line utilization should begin to rise.
We hope Bank of America will continue lending growth as long as the economy moves in its current direction. I also believe that long-term rates should be at or close to the bottom, which will be a key driver of net interest rates for the rest of the year.
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