U.S. banks enter earnings season with eyes on loan growth

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U.S. banks will face tough questions about the outlook for their lending operations this week when they release second-quarter profits flattered by smaller-than-expected credit losses during the pandemic.

According to analyst forecasts compiled by FactSet, average quarterly earnings per share are expected to jump 116 percent year-on-year at the six largest banks in the United States.

However, much of the improvement reflected the early release of billions of dollars in reserves that lenders had set aside to cover potential loan losses. Income is expected to fall 5%, according to FactSet, due to slowing capital market activity and weak demand for loans.

“The big numbers are going to be impressive,” said Nathan Stovall, senior research analyst at S&P Global Market Intelligence. “The problem is, the streets have been expecting this for some time. . . what they’re looking for now is loan growth, loan growth, loan growth.

Investors have previously expressed concerns about whether U.S. banks will be able to find profitable uses for the trillions of dollars in deposits they added as the Federal Reserve pumped liquidity into the financial system during the pandemic.

The KBW Bank Index fell 8% over the past month as falling long-term interest rates raised concerns about a key indicator of bank profitability – the 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 predict the second quarter will be the low point in the net interest margin cycle. They said they also believe the first quarter was the trough in net interest income, the total income banks earn from interest-bearing assets, net of funding costs.

“Net interest income has stabilized but has not started to increase,” said Chris Kotowski, analyst at Oppenheimer. “The key question is: when does it start to grow? “

Goldman expects the net interest income of the six major banks it covers – JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, PNC and US Bancorp – to increase by 2% on average quarter to quarter. the other.

JPMorgan and Goldman kick off the earnings season on Tuesday, followed by BofA, Citi and Wells on Wednesday and Morgan Stanley on Thursday.

Most of the major U.S. banks presented plans last month to pay investors billions of dollars in additional dividends and buy back more of their own stock after the Fed eased restrictions on shareholder payments imposed during the pandemic .

However, JPMorgan, the largest US bank by assets, raised concerns about the lending outlook last month when it lowered its forecast for second-quarter net interest income by more than $ 2 billion. of dollars.

At the time, Chief Executive Officer Jamie Dimon said he was seeing “only a tiny bit” of loan growth. Since then, the Fed has reported that US consumer credit grew at a seasonally adjusted annual rate of 10 percent in May.

“Loan growth, while sluggish in the near term, is expected to improve this year and especially next year,” said Jason Goldberg, banking analyst at Barclays.

As loan growth languished, bank executives reported dramatic gains in commission-generating trading and investment banking. While these fees are expected to stay well above pre-pandemic levels, investors are not convinced these benefits will be sustainable.

“It’s good that the capital markets and some of these high yielding companies have been so strong over the past year, but the impact of [net interest income] is still extremely important to all of these big banks, ”said Chris Bingaman, portfolio manager at Diamond Hill Capital Management, an investment manager. “The fundamentals don’t change until it comes back. ”


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