Company / Analytics

Analytics, 16 April 2021

Big Bank Earnings and the US Economic Performance

Major US banks, including JPMorgan Chase, Goldman Sachs, and Wells Fargo released blowout earnings report with record profits that analysts believe reflects the US economy is improving, as the COVID-19 wave subsided, and the economy began to recover earlier this year.

JPMorgan Earnings

JPMorgan Chase & Co. reported Q1 2021 earnings that beat analyst estimates by a wide margin. Quarterly revenue surpassed expectations, while net interest margin which the bank refers to as “net yield on interest-earning assets,” came in at 1.69% for the quarter, below analysts’ expectations. It measures the difference between the interest the bank earns on the assets it owns and the interest it pays out to depositors and other creditors, similar to the gross margin for businesses in general.

The bank posted a first-quarter profit of $4.50 a share including a $1.28 per share benefit from the reserve release, higher than the $3.10 per share expected by analysts surveyed by Refinitiv. Revenue of $33.12 billion exceeded the $30.52 billion estimate, driven by the firm’s trading operations, which produced about $1.8 billion more revenue than analysts had expected.

The net interest margins have been squeezed since the Federal Reserve lowered rates in 2020 to help deal with the economic crisis caused by the COVID-19 pandemic. According to Investopedia, margins are squeezed by lower interest rates because this means there is less room for banks to extract margin between the rate at which banks pay depositors and the rate at which it charges on loans. JP Morgan also released $5.2 billion in reserves that were being held as a buffer against loan losses. This suggests the bank is more confident that it is past the point where it would see a major uptick in loan losses, and that the total amount will be less than previously expected as vaccine rollouts and government stimulus help bolster economic recovery.

CEO Jamie Dimon said that he believes the economy has the potential for extremely robust growth over the next few years. However, JPMorgan did not provide any specific guidance for the next quarter or full year. Shares were down about 0.7% in pre-market trading. As of the market close on April 13, 2021, JPM’s shares were up 63.5% in the past year versus 44.9% for the S&P 500’s, having rebounded sharply from major declines last year like many financial stocks.

Goldman Sachs earnings

Goldman Sachs on Wednesday blew past analysts’ expectations with record first-quarter net profits and revenues on strong performance from the firm’s investment banking and trading businesses.

The bank posted per-share earnings of $18.60, crushing the $10.22 estimate of analysts surveyed by Refinitiv. The results represented a growth of 498% from a year earlier. Revenue of $17.7 billion easily topped expectations of $12.6 billion, CNBC reported.

Shares rose 4.5% on Wednesday following the release, which showed that Goldman’s first-quarter revenues more than doubled on a year-over-year basis. As of the latest reading, the stock was on pace for its best day since January. Expectations were high for Goldman as the economic recovery and record first-quarter issuance of blank-check special purpose acquisition companies were expected to lift investment banking revenues. Earlier on Wednesday, JPMorgan Chase posted robust trading results for the first quarter and a $5.2 billion tailwind from releasing funds it had set aside for loan losses that did not materialize.

At Goldman, the deluge of SPACs helped push investing banking net revenues to a record $3.77 billion for the quarter, including record equity underwriting. The headline investment banking revenue number exceeded the $2.9 billion estimate and represented a 73% surge from a year earlier.

Asset management generated record quarterly net revenues of $4.61 billion, reflecting record net revenues from equity investments.

Global Markets unit produced a 47% jump in revenue from a year earlier to $7.58 billion. That sum was split between $3.89 billion in fixed-income trading and $3.69 billion in equities, which reflected year-over-year growth of 31% and 68%, respectively.

Of the six biggest U.S. banks, Goldman gets the largest share of its revenue from Wall Street activities including trading and investment banking. For the past few years that has been a detriment to the firm, as retail banking fueled by cheap consumer deposits had driven the industry’s record profits.

Wells Fargo earnings

Wells Fargo & Co beat Wall Street profit expectations on Wednesday as it reduced bad loan provisions and reined-in costs, signaling the bank may finally be emerging from a sales practices scandal that has dogged it for nearly five years, Yahoo reported.

Profits rebounded to nearly $5 billion in the first quarter of 2021 as the improved economic outlook allowed it to cut its cushion for losses on pandemic-hit loans by $1.6 billion, and as it got a grip on costs relating to fixing its product mis-selling scandals.

It remained unclear, though, how much longer the bank expects to operate under a regulatory asset cap, which has curtailed loan and deposit growth needed to boost interest income and cover costs, while rival balance sheets have swelled. Despite those constraints, the bank had benefited from the strengthening U.S. economy which has been boosted by the COVID-19 vaccination roll-out, ultra-loose monetary policy, and additional fiscal stimulus, said chief executive Charles Scharf.

Shares were up 5% in afternoon trading on Wednesday, and are set to close the week above $40 (they were trading at $42.78 at the time of writing on Friday). Controlling costs, which had been inflated by billions of dollars of regulatory and litigation penalties relating to the bank’s sales scandal, are central to the bank’s turnaround plan.

On Wednesday, the bank’s Chief Financial Officer Mike Santomassimo told reporters the bank expected to further reduce loss reserves if the economy continues to improve. Consumers already are flush with cash from government stimulus and loan payment forbearance programs, he noted.

However, Wells Fargo’s pre-tax, pre-provision profit, seen this quarter as a better gauge of lenders’ true performance, was down 13% from a year earlier. By comparison to JPMorgan’s 18% first quarter, pre-provision profit was up 18%, which underscores how Wells Fargo’s profitability still lags rivals.

Big bank earnings reflect an improved economy

Analysts believe the strong bank earnings reflect the US economy, which is poised for recovery in the early stages of economic reopening. Government stimulus credit and ongoing vaccinations are largely responsible for the growing optimism about the economic outlook.

Indeed, big banks are exposed to the economy and saw a downturn last year as they took reserves and potential for loan loss provisions. The earnings follow a slew of promising economic data. For instance, a blockbuster jobs report earlier this month showed the economy added 916,00 jobs and the unemployment rate fell to 6% in March. Similarly, the Institute for Supply Management survey — a measure of U.S. services activity — reached a record high of 63.7 last month.

Meanwhile, on Thursday, new data showed that retail sales soared 9.8% in March. In addition to the vaccine optimism and reopening, the various better-than-expected economic data indicate strong positives for the recovery of the economy.

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