US banks will face tough questions about the prospects for their lending operations this week when they report second-quarter earnings flattered by smaller-than-expected credit losses during the pandemic.
Average quarterly earnings per share are expected to jump 116 per cent year on year at the top six banks in the US, according to analyst forecasts compiled by FactSet.
However, much of the improvement reflects the anticipated release of billions of dollars in reserves lenders had set aside to cover potential loan losses. Revenues are expected to fall 5 per cent, according to FactSet, the result of slowing capital markets activity and tepid loan demand.
“The headline numbers are going to look awesome,” said Nathan Stovall, a senior research analyst at S&P Global Market Intelligence. “The issue is the Street has expected that for some time . . . what they’re looking for now is loan growth, loan growth, loan growth.”
Investors have already signalled their concerns about whether US banks will be able to find profitable uses for the trillions of dollars in deposits they have added as the Federal Reserve has pumped liquidity into the financial system during the pandemic.
The KBW Bank index has dropped 8 per cent over the past month as falling longer-term interest rates have raised fears about a key gauge of bank profitability — net interest margin, which measures the difference between what banks pay for deposits and what they earn on loans and other assets.
Goldman Sachs analysts have forecast that the second quarter will be the low-point in the cycle for net interest margin. They said they also believed that the first quarter had been the trough for net interest income, the total revenue banks earn from interest-bearing assets net of financing costs.
“Net interest income has stabilised but it hasn’t started growing,” said Chris Kotowski, an analyst at Oppenheimer. “The key question is: when does it start growing?”
Goldman expects net interest income for the six large banks it covers — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, PNC and US Bancorp — to rise 2 per cent on average quarter on quarter.
JPMorgan and Goldman kick off earnings season on Tuesday, followed by BofA, Citi and Wells on Wednesday, and Morgan Stanley on Thursday.
Most of the large US banks last month outlined plans to pay investors billions of dollars more in dividends and buy back more of their own stock after the Fed loosened restrictions on payouts to shareholders imposed during the pandemic.
However, JPMorgan, the biggest US bank by assets, raised concerns about the lending outlook last month when it lowered its forecast for net interest income in the second quarter by more than $2bn.
At the time, Jamie Dimon, chief executive, said it was seeing “just a teeny-weenie little bit” of loan growth. Since then, the Fed has reported that US consumer credit rose at a seasonally adjusted annual rate of 10 per cent in May.
“Loan growth, while sluggish in the near term, should improve as this year goes and particularly into next year,” said Jason Goldberg, a banks analyst at Barclays.
While loan growth has languished, bank executives have pointed to eye- popping gains in fee-generating trading and investment banking businesses. Although those fees are expected to remain well above pre-pandemic levels, investors are not convinced those profits are sustainable.
“It’s nice that capital markets and some of these high-return businesses have been so strong over the past year but the impact of [net interest income] is still extremely important for all of these big banks,” said Chris Bingaman, portfolio manager at Diamond Hill Capital Management, an investment manager. “The fundamentals don’t turn around until that comes back.”
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July 12, 2021 at 10:00AM
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US banks enter earnings season with eyes on loan growth - Financial Times
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