Banks and financial institutions have been on the back foot since the 2008 global financial crisis. The fallout from that event was severe, with banks losing billions of dollars in market capitalization and reputation. But now, as the world starts to recover, it’s time for banks to make a comeback.
Banks are recovering from the epidemic, which drove quarterly earnings soaring. This is bringing attention to their flaws.
JPMorgan Chase JPM 0.08 percent & Co. is the first of America’s major banks to announce third-quarter results this week. According to FactSet, analysts anticipate banks in the S&P 500 to post aggregate earnings of approximately $31 billion, up about 20% from a year ago but down 20% from the second quarter. In the fourth quarter, profits are anticipated to remain stable.
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After a frantic 18 months, profit levels have stabilized. Banks spent most of 2020 accumulating tens of billions of dollars to prepare for consumer and commercial loan losses, which resulted in a significant drop in earnings. Banks were able to free up the majority of their loan-loss reserves when the economy improved. Profits increased.
Those epidemic blips obscured banks’ sluggish lending growth while momentarily inflating trading income. Analysts are attempting to determine what the new normal will entail.
Bank stocks have been among the strongest performers this year, but their run has come to an end. In the third quarter, the KBW Nasdaq Bank Index, which has gained almost 40% this year, hardly moved.
Here are a few things to keep an eye on in this week’s bank results.
Loan Expansion
Individuals and companies are loaded with cash because to the US government’s attempts to keep the economy viable throughout the epidemic. They aren’t borrowing, therefore they aren’t borrowing.
According to Federal Reserve statistics, total loans at US banks have increased by just 1% since the end of June.
Increased credit-card spending, particularly on travel and eating, was expected to drive loan growth last quarter, according to bank officials. Customers are paying off their debts, and companies aren’t taking out loans, according to CEOs speaking at recent conferences. The focus now shifts to the upcoming Christmas season.
“Though loan growth has been sluggish to rebound,” Goldman Sachs bank analysts said, “we think we have reached the turning point.”
Rates of Interest
The Federal Reserve has maintained interest rates at zero, reducing lending earnings for banks.
According to the Federal Deposit Insurance Corp., net interest margin, which is the difference between what banks earn on lending and what they pay on deposits, dropped further in the second quarter, hitting a new low.
The third quarter isn’t expected to show much progress, according to analysts. Analysts anticipate both loan profits and margins to stay unchanged for the fifth quarter at JPMorgan, Bank of America Corp. BAC 0.50 percent, Citigroup Inc. C 0.22 percent, and Wells Fargo & Co. WFC 0.50 percent.
The Federal Reserve is unlikely to increase interest rates until next year. Bank executives should anticipate to be asked about how much money they can earn if interest rates rise, as well as what would happen if the Fed does not act as predicted.
Markets
Since Covid-19 ripped through the economy, frantic trading activity has been a bright light on Wall Street, but it is diminishing.
According to bank executives speaking at recent conferences, stock-trading revenue is still above pre-pandemic levels, but fixed-income revenue is likely to fall.
Analysts at Deutsche Bank predicted a 5% rise in market revenue among the banks they cover, with a 14% increase in stocks trading. Fixed-income, currency, and commodities revenue are expected to decrease by 20%.
Banking on investments
Even yet, one major industry is booming: investment banking. Global mergers are at an all-time high, while underwriting volumes, especially for initial public offerings and high-yield bonds, are at an all-time high.
The fiscal third-quarter results published by Jefferies Financial Group Inc. on Sept. 30 provide a glimpse of the climate that larger competitors are facing. Investment banking costs at the company quadrupled, setting a new high. Jefferies’ backlog of prospective transactions was as large as it has ever been, according to CEO Richard Handler.
On Wednesday, JPMorgan Chase begins the earnings season for major U.S. banks.
The Wall Street Journal’s Gabby Jones took this photo.
David Benoit can be reached at [email protected]
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