US Banks' Strong Earnings

US Banks' Strong Earnings

over 3 years ago3 mins

Mentioned in story

Big US banks reported second-quarter earnings last week, shrugging off potentially problematic loan loss provisions with encouraging news about their trading businesses.

⏰ Recap

  • In March, the Federal Reserve cut US interest rates to historic lows
  • Since then, US stocks have rallied into “bull market” territory and had one of their best quarterly performances ever
  • On Tuesday, JPMorgan, Citigroup, and Wells Fargo reported mixed second-quarter results
  • And by Thursday, Goldman Sachs, Bank of America, and Morgan Stanley had wrapped up major banks’ earnings on a positive note

✍️ Connecting The Dots

US banks had their trading arms to thank for what was a strong – if not record – revenue quarter. Investors, after all, rapidly chopped and changed their portfolios as the fastest-ever stock market slump into a “bear market” quickly reversed into a bull market rally. And that meant more commissions for the investment banks that helped investors capitalize on the swings.

Investment banks’ advisory businesses were the surprise belles of the ball last quarter. While it may have seemed as though most companies were immobilized by the worst of the pandemic, that wasn’t quite true: lots of them were – perhaps more quietly than usual – busy listing special-purpose acquisition companies, raising money by selling additional shares, and taking advantage of the Federal Reserve’s unlimited bond-buying program by issuing new bonds – all of which lined banks’ pockets with fees.

But things weren’t all plain sailing. With interest rates low, banks earned less from new loans – and that pressure was compounded by rising loan loss provisions. In other words, major US banks put a combined $35 billion aside to cover potential defaults from borrowers, which might say something worrying about their expectations for the financial health of US consumers. If they’re bracing for missed loan payments, it might mean consumers are cash-strapped – which will only get worse when government support comes to an abrupt end. That’ll have a knock-on effect on their ability to spend, with negative consequences for any would-be bounceback of economic or company earnings growth.

🥡 Takeaways

The US’s central bank regularly assesses how well the country’s commercial banks are positioned for a downturn, and its June tests revealed Goldman Sachs didn’t have enough of a “capital buffer” – or money in reserve. That, despite the fact all major banks had suspended their share buybacks so they had more cash on hand. Some banks have more than enough cash to weather any storm, mind you – which might be why the likes of JPMorgan Chase are reportedly considering buying up tech companies to boost their banking businesses.

Banks with large consumer segments – think Bank of America, Wells Fargo, and the world’s largest credit card provider, Citigroup – would’ve been in a world of pain last quarter if not for their trading and advisory businesses. Morgan Stanley, however, might offer a blueprint for a different kind of diversification: most of the bank’s profit comes from its relatively stable investment management business, which means upticks in more volatile businesses like trading might boost its earnings but are unlikely to ruin a quarter if things go south.

🎯 Also On Our Radar

While healthcare investors focused on potential coronavirus vaccines from Moderna and AstraZeneca, pharmaceutical behemoth Johnson & Johnson reported stronger-than-expected second-quarter results thanks to demand for its over-the-counter medicines. It’s doing its bit to work on a coronavirus vaccine too, but given the giant’s worth $400 billion, its investors aren’t reliant on progress in one tiny segment of its business to boost its shares.

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