Bank of America is poised to do well once loan growth picks up.
David Paul Morris/Bloomberg
Third-quarter earnings season just ended for the biggest U.S. banks, whose results were—let’s call them adequate.
There is a lot to like about the banks: They were unbowed by the Covid pandemic, due to their strong balance sheets and diverse business mix. In the third quarter, the biggest banks released back into earnings more than $6 billion they had reserved against potentially bad loans last year. That followed sizable reserve releases in previous quarters. Advisory revenue, a source of strength since the second half of 2020, continues to impress. There were even hints, in the latest quarter, that customers are getting ready to borrow.
But safety and a continuation of recent trends wasn’t enough to spur excitement among investors. Of the six big banks, only shares of Bank of America (ticker: BAC) got a big pop on earnings day, after it reported a 58% surge in profits. Shares of JPMorgan Chase (JPM) and Wells Fargo (WFC) fell after they released earnings. In a year when the SPDR S&P Bank exchange-traded fund (KBE) is up 32%, it’s going to take something big to keep investors interested.
Yet, it is unclear what that will be. Deal-making continues to boost bank earnings in the absence of loan growth, and the banks—and investors—hope that will continue until loan demand returns. JPMorgan, for instance, saw a 52% jump in investment-banking revenue in the quarter, driven by record advisory and equity-underwriting fees. Morgan Stanley (MS) also highlighted record advisory revenue as more merger-and-acquisition transactions were completed in the quarter. Goldman Sachs (GS) saw its second highest investment banking revenue helped by—you guessed it—record levels in advisory.
Maintaining the third quarter’s deal pace may be difficult, but JPMorgan’s chief financial officer, Jeremy Barnum, said business pipelines remain healthy and activity should be up year over year, if not sequentially, in the current quarter.
A longer runway for deals is crucial for the banks, as third-quarter results showed that customers are only now beginning to borrow again. For much of the Covid pandemic, banks found themselves sitting on deposits as households and businesses were flush with cash. Deposits are still elevated relative to prepandemic levels, but the pace of deposit growth is slowing. Deposits grew 2% quarter to quarter at JPMorgan, after climbing 19% year over year.
As deposit growth slows, the banks are depending on loan demand to rise. That will allow the banks to boost their net interest income, as they earn more on new loans than they pay out in interest on deposits. Among the more interest-rate-sensitive big banks—Bank of America, Wells Fargo, JPMorgan, and Citigroup (C)—net interest margins all showed either stabilization or modest improvement quarter over quarter.
Bank of America, the subject of a favorable Barron’s article earlier this year, seems best positioned to navigate this transitory period, in which capital-markets activity remains elevated and loan growth is sluggish. Like its peers, it recorded record advisory fees for the third quarter. Unlike peers, however, BofA saw a more modest 5% drop in fixed-income trading, while equities trading surged 30%.
Even if deal-making and trading slow, Bank of America, which just topped $1 trillion in deposits, is poised to do well when loan growth returns in force. “What the market seems to miss is the value of more deposits…once the money gets put to work,” says Mike Mayo, a banking analyst at Wells Fargo Securities. In BofA’s case, it could be a gold mine.
Write to Carleton English at [email protected]
