• Goldman Sachs, JP Morgan and other banking peers released first quarter figures last week
  • Investors place high importance on second-half bank lending boom

The first quarter earnings season for the US banking sector reflected the many contradictions of the current economic climate.

In short, US banks have to deal with both a massive influx of deposits since the start of the pandemic and a lack of profitable ways to lend them. The focus was therefore on how loans in the second half of the year would recover, particularly in the context of a booming economy and a White House administration that intends to spend hugely and heavily. ” adjust corporate taxes accordingly.

Essentially, the growth of the banking sector in the coming year will depend on whether large US corporations will borrow to finance a major economic expansion. There is no doubt that investors attach great importance to a boom in bank lending in the second half of the year. Stock prices prior to the first quarter had risen twice as fast as the benchmark S&P 500 since the start of the year (see chart) and, with the Federal Reserve saying interest rate increases this years are “highly unlikely,” the stage is set for a major credit expansion.

What became evident as the quarterly reports progressed was that banks that could charge trading fees or provide advice on M&A transactions were the main winners. Retail banking operations have generally struggled amid weak demand for loans in an economy struggling with the effects of the pandemic.

Goldman Sachs in Squid

Unsurprisingly, everyone’s favorite sea creature Goldman Sachs (United States: GS) finally saw its outsized trading operation perform well in a quarter dominated, at times, by frenetic market volatility. Investment banking income rose 73% to $ 3.77 billion, while stock trading was the biggest gainer with sales up 68% to $ 3.69 billion.

A developing theme for the reporting season was the relative lack of credit provisions for bad debts. Goldman’s allowance for credit losses, for example, ended up being relatively modest at $ 70 million, compared to $ 937 million that had been set aside. DA Davidson analysts estimate earnings per share for the year 2021 to be around $ 37.83.

Cut to JPMorgan Chase

Goldman’s Wall Street neighbor, JPMorgan Chase (US: JPM), also had a champagne quarter with CEO Jamie Dimon hailing “multi-year growth” driven by quantitative easing, an open economy and potentially large levels of infrastructure spending. He predicted this would continue into 2023.

It should be noted that the results were somewhat flattered by an even larger influx of bad debt reserves after the expected level of write-downs simply did not materialize. This represented a total inflow of $ 5.2 billion from its reserves. JP Morgan is much more present in the consumer market compared to Goldman and the impact of the pandemic is behind the poor performance of consumer banking services, with revenues down 10% to 5.6 billion of dollars. This was offset by the surge in stock sales as Americans spent federal stimulus checks on stocks. Sales of stock trading rose 47 percent to $ 3.3 billion. The consensus estimate of EPS for the full year 2021 is currently $ 11.34.

How far will Wells go?

The results that gave the broadest picture of the US economy came from San Francisco Wells fargo (United States: WFC). The bank, which appears to have a branch on nearly every major street in the United States, illustrated why analysts are excited about the prospects for growth in business and consumer loans in the second half of the year. Wells’ vast consumer sector saw total loans decline in the quarter by 8% to $ 353 billion, while deposits soared 21% to $ 789 billion.

This creates a significant headache for the bank, as deposits must be matched with an increase in capital reserves so that the capital ratio rules are followed. The onus then falls on finding cost-effective ways to lend those deposits this year or risking regulatory problems in 2023 if the current rules on capital reserves are maintained. The bank’s management remained cautious about loan growth for the coming year, but suggested that the general economic recovery would benefit its core lending.

Similar to JP Morgan’s results were flattered by an influx of debt reserve reserves of $ 5.1 billion.

The consensus forecast currently puts Wells Fargo on EPS of $ 3.08 for 2021.

The contrasting fortunes of Bank of America and Citigroup

results for Bank of America (United States: BAC), the second largest bank in the United States, illustrated the different fortunes in the larger sector. There was a net inflow of deposits of $ 187 billion, an increase of 25%. Meanwhile, consumer loans fell 8% to $ 26 billion. That contributed to broadly stable revenues of $ 22.8 billion, as the performance of the mainstream bank – a revenue decline of 12% to $ 8.1 billion – staying on course for the share price. Overall, the BoA expects the same relaxation in consumer spending as other retail banks accepting deposits.

Meanwhile at Citibank (US: C), rising trading and underwriting fees have enabled the bank to achieve a record quarterly profit, although its operations in this area are relatively small compared to its neighbors on Wall Street. The net profit exploded thanks to the forecasts of the analysts to reach 7.9 billion dollars, against 5.1 billion dollars expected by the market. As with Goldman and JP Morgan, funds freed from reserves to cover potential bad debts also flattered the top line, with an inflow of $ 3.85 billion. In a sign of the times, the world’s largest credit card issuer saw balances drop 14 percent, although management expects the situation to reverse as the economy recovers.

It is also evident that Citigroup is going to get a bit smaller as a result of these results. The ongoing strategic review led by new CEO Jane Fraser seemed to indicate a significantly leaner retail banking operation, overall. The bank intends to exit its retail operations in 13 countries in Asia, Europe and the Middle East.

The other real source of interest is whether Citigroup will continue to benefit from underwriting Special Acquisition Vehicles, or SPACS. These are single-use vehicles used to research unspecified acquisition opportunities. Citigroup has a disproportionate role, compared to other banks, in supporting these vehicles, which allowed it to earn $ 876 million in fees in the quarter alone from underwriting shares. The Securities and Exchange Commission is already making warning sounds about restricting these vehicles. Readers with longer memories might recall that similar “goal-seeking flotation” was a feature of the South Sea Bubble in 1720.

Blackrock Rides the Fixed Income Wave

As the world’s largest asset manager, Black rock (US: BLK) remains a reliable barometer of investor sentiment. It is the strong sense of investor confidence that is now benefiting asset managers, which helped fuel Blackrock’s performance in the first quarter. Strong entries in its index and managed fixed income funds, and the resulting fees, contributed to a 16% increase in net income to $ 1.2 billion, from $ 1.03 billion a year earlier. Total net inflows increased by $ 172 billion, meaning the asset manager now has more than $ 9.01 billion under management. The share price this year has risen more than 11 percent.

Where do the banks go from here?

The first quarter reporting season left a distinct impression that the U.S. banking sector, at least, has weathered the pandemic in much better shape than one might expect. This coincides with a recent round of debt revaluations in the sector. Moody recently upgraded its rating from “stable” to “negative” and cites the industry’s stabilized credit risk. Bank CEOs seem to have learned a lesson from 2008 by prioritizing their capital positions over their total assets. While Moody’s believes loan write-downs are likely to increase from a very low level, the rating agency said the capital buffers are sufficient to support both that and higher yields for them. shareholders.

What’s interesting about the U.S. banking sector – from an investment perspective – is that U.S. banks represent a much smaller share of the economy, around 7.5% in terms of GDP, than it does. This is the case in countries like the UK and Switzerland. . In turn, this makes buying stocks a sort of index for tracking US economic performance in a much more direct way.