Banks, After Bracing for Disaster, Are Now Ready for a Boom
April 13 2021 - 05:59AM
Dow Jones News
By Ben Eisen
The accelerating economic recovery is likely to boost bank
profits.
Encouraged by government efforts to pump money into the economy
and signs that Americans are spending more, the largest financial
institutions are expected to release some of the rainy-day money
they set aside after the coronavirus pandemic hit. That will offer
a jolt to their income in the first three months of the year.
JPMorgan Chase & Co., Wells Fargo & Co. and Goldman
Sachs Group Inc. will disclose financial results on Wednesday. Bank
of America Corp. and Citigroup Inc. report Thursday and Morgan
Stanley follows on Friday. Analysts forecast that all of them will
post first-quarter profits that are far above year-earlier
levels.
Already, investor expectations are high. The KBW Nasdaq Bank
Index, which tracks shares of the largest lenders, is up 27% so far
this year, nearly triple the gains of the S&P 500.
Banks are seen as proxies for the health of the U.S. economy.
Their shares were in the doldrums around this time last year, when
global commerce ground to a halt. But over the past few months, the
stocks have bounced back. The index returned to a record in March,
topping its prior high from 2007.
"The U.S. economy will likely boom," JPMorgan Chase Chief
Executive Jamie Dimon wrote in his annual letter last week. "This
boom could easily run into 2023 because all the spending could
extend well into 2023."
Banks had set aside tens of billions of dollars in reserves to
prepare for a wave of loan losses. Those reserves were booked
against profits, depressing income for the first half of last
year.
With banks gaining confidence in the rebound, analysts expect
them to release those reserves, which will in turn juice their
bottom lines.
Banks still have some challenges to confront as business returns
to normal. Low interest rates have weighed on the spread between
what banks pay to borrow and what they earn from lending,
depressing the profitability of their bread-and-butter
businesses.
Moreover, the largest lenders would like to increase the amount
of credit they extend to businesses and individuals, but loan
demand has been soft. Executives say they hope that demand will
pick up later this year.
Some of the business lines that shined during the pandemic are
now cooling off. Low rates drove mortgage lending to record levels.
As rates have risen, originations have declined. While they remain
at high levels, the drop may eat into the fees banks earn from
making home loans.
Trading and investment banking have been bright spots throughout
the pandemic. In the first three months of the year, that likely
continued because of hot demand for special-purpose acquisition
companies.
These shell companies raise money through initial public
offerings, then merge with businesses to take them public without
the typical red tape of an IPO. In the first three months of the
year, more SPACs went public than in all of 2020. Banks typically
earn money by underwriting the IPOs and advising on the
mergers.
The improving economic outlook also means regulators have once
again allowed banks to buy back their own stock in the first
quarter. However, the amount of buybacks and dividend distributions
they undertake can't exceed the average quarterly profit from the
four most recent quarters. Those restrictions are due to lift after
the end of June.
--Amrith Ramkumar contributed to this article.
Write to Ben Eisen at ben.eisen@wsj.com
(END) Dow Jones Newswires
April 13, 2021 05:44 ET (09:44 GMT)
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