Earnings reports this week from the country’s major banks are on track to show a continued robust recovery for Wall Street — and a boundless appetite for investment banking.
JPMorgan Chase and Goldman Sachs kicked off this quarter’s round of bank earnings announcements with better-than-expected results. The strong numbers were boosted by a release of some of the funds that banks had set aside when Covid-19 first swept the nation.
“Even if growth has peaked and starts to slow, it's likely to remain robust through 2022, at least,” said Jeff Mills, chief investment officer of Bryn Mawr Trust. “Folks are in better shape.”
Later this week, Bank of America, Wells Fargo, Citigroup and Morgan Stanley will also report earnings.
Chase Chairman and CEO Jamie Dimon characterized the consumer outlook as rosy in the report. “Consumer and wholesale balance sheets remain exceptionally strong as the economic outlook continues to improve,” he said, noting “the increasingly healthy condition of our customers and clients.”
Spending on debit and credit cards rose by 45 percent — unsurprising given the moribund state of the U.S. economy in the second quarter of 2020, but Dimon said this rebound also eclipsed the same quarter in 2019, up 22 percent.
Goldman Sachs’ returns were buoyed by the strength of seemingly limitless investor appetite for IPOs. Similarly, Dimon said that fees from investment banking at Chase hit a record of $3.6 billion, an increase of 25 percent.
Another factor boosting the number is that big banks are releasing some of loan loss reserves they hoarded at the start of the pandemic, anticipating a wave of loan, mortgage and credit defaults that never came. As banks have been releasing this money, it boosts their bottom line, a transitory effect analysts say Wall Street has already priced in.
“We expect the rest of those reserves to be released through earnings over the next several quarters. The result is headline earnings should look favorable for 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 when they look forward.
“It’s going to be looking more at management's guidance into the future, especially in reference to loan growth,” said David Wagner, portfolio manager at Aptus Capital Advisors. “The demand for loans is still quite muted… Consumers are still flush with cash and a lot of companies have not been spending capital.”
However, the pandemic remains a lingering threat. “We've got to always watch out. 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, though, that current conditions give the market reason to remain hopeful. “We would not expect any sort of broad economic shock any time soon,” he said.
Goldman Sachs CEO David Solomon also noted in the firm’s earnings release that the market can’t be complacent about Covid-19 just yet. “While the economic recovery is underway, our clients and communities still face challenges in overcoming the pandemic,” he said.
The high-flying housing market has prompted perhaps inevitable comparisons to the 2008 market crash and real estate crisis, but analysts say the underlying fundamentals are different this time around. “It’s night and day versus the last recession,” Mayo said. “The last recession, banks were a cause of the problem and a source of weakness.” Now, he said, “Banks have been a source of support for the economy and a source of strength.”
“Folks are in better shape. The housing market is a great example. We've seen a fervor there, but lending standards have remained relatively conservative, especially compared to where they were 10 years ago,” Mills said.
A muscular regulatory response after the Great Recession, although often criticized by the banks in the ensuing years, might have been the invisible shield that protected them from catastrophe.
“Kudos to the bank regulators a decade ago for enforcing the foundation of the banks,” Mayo said. “Banks were in strong enough condition going into the pandemic that they could survive.”