As investors brace themselves for disappointing earnings reports across much of the business world, the nation’s largest banks are expected to post solid earnings this week, thanks to the central role they play in reopening the economy .
Banks’ quarterly reports will reflect a bumpy and changing recovery – their business operations will likely fall short of last year’s windfall, while consumer divisions are likely to fare better, with vaccinated Americans spending more in goods and leisure.
“The health of the economy is the main driver of banks,” said Alison Williams, analyst at Bloomberg Intelligence. “The consumer is spending – likewise, businesses look healthy. “
The results coming this week will come from a period of transition – starting in July, when optimism was high, and ending in September, after the Delta variant of the coronavirus once again spiked infection rates and analysts have lowered their expectations for economic growth.
As infections decline, many factors are still causing turmoil: Ongoing supply chain disruptions and labor costs are contributing to inflation, and the Federal Reserve may start cutting some of its supports. next month. And the future of banking results will depend heavily on consumer and business confidence in borrowing.
Loan growth was on the decline at the start of the pandemic and has so far been slow to recover. Consumers and businesses have benefited greatly from the government’s stimulus efforts, which have reduced demand for credit and helped them pay off debts or raise more cash.
But Richard Ramsden, analyst at Goldman Sachs, wrote in a recent report that demand for loans was showing signs of increasing.
“We think we’ve reached the inflection point,” he wrote. “We consider the outlook to be increasingly encouraging. “
The first major bank to report results this week will be JPMorgan Chase, which analysts predict will post higher earnings on Wednesday. Four other companies – Bank of America, Wells Fargo, Citigroup and Morgan Stanley – will release their results on Thursday, with Goldman Sachs reporting on Friday.
Some of the gains will likely come from the money lenders already have on hand as they cut funds for the rainy days they set aside earlier in the pandemic to protect against high default rates that never materialized, thanks to the government’s stimulus efforts.
Bank transactions on Wall Street are expected to yield strong results from closing deals. JPMorgan’s investment bank benefited from a “very robust” environment, with better-than-expected performance in mergers and acquisitions, said Marianne Lake, its co-managing director of personal and community banking services, at the meeting. of an investor conference last month.
But trading revenues – which soared at the start of the pandemic during a surge of market activity – will likely fall by around 10% from the previous year, she said. Analysts expect other lenders to take a hit from these stellar results as well.
Ms. Lake was optimistic about the behavior of households and businesses over the coming months. “We expect to see loans start to increase,” she told the investor conference.
Bank stocks rose about 38% in 2021, and their stocks are likely to rise as the economy gains momentum, Credit Suisse analyst Susan Roth Katzke wrote in a research report.
Still, investors should be cautious as bank valuations are already high and lenders will most likely face tighter regulation under the Biden administration that could reduce their earnings, wrote James Fotheringham, analyst at BMO Capital Markets.
Last month, Senator Elizabeth Warren called on the Federal Reserve to force Wells Fargo to cut off core banking activities, such as offering checking accounts and savings and loans, from its other financial services. The company was also hit with fines and penalties totaling $ 322.6 million in September for problems in its mortgage business and currency mismanagement.
Investors and other businesses will be watching the credit giants closely for their economic prospects and may be guided by their positions on public policy.
Throughout the pandemic, bank CEOs have expressed support for stimulus packages, and more recently they have weighed in on the debt ceiling deadlock. Wall Street banks are also a barometer of workforce trends, especially as major employers navigate remote work agreements and vaccination policies – although banks have taken different approaches. Goldman Sachs and JPMorgan have recalled employees to the office during the summer, but Wells Fargo has delayed the return of its staff until January 10.
Another topic investors may watch out for is succession planning at major financial giants, particularly after Bank of America chief executive Brian Moynihan made sweeping leadership changes, promoting executives after some of the its most powerful leaders have decided to retire or move to different roles. JPMorgan and Morgan Stanley also reshuffled their top ranks to prepare for a new guard of executives who could eventually take the helm.
But more than anything, investors will be attentive to bankers’ forecasts, given the range of economic risks that lie ahead.
“We have an improving macroeconomic environment, and that’s a good thing,” Citigroup CFO Mark Mason said at the September conference where Ms. Lake also spoke. The bank is closely monitoring everything from inflation to the job market to an economic slowdown in China. But, overall, his assessment is that “the global economy and sentiment remain quite positive,” he said.