This gap in the banking industry reflects the bifurcated rebound in the United States from the pandemic.
“Time is the killer in this. The longer this pandemic goes on, the worse it gets,” said Chris Marinac, a banking analyst and director of research at Janney Montgomery Scott.
Bad-loan war chest boosted by another $31 billion
“Bankruptcies continue to rise. There is continued stress in the labor market. This is not going to be over anytime soon,” said Constance Hunter, chief economist at KPMG.
“We’re still in the middle of the storm. Banks are focused on getting ahead of it,” said Marinac.
Low rates mean weak profits
But it’s not just the mounting loan loss reserves dinging banks.
They’re are also getting squeezed by the extremely low interest rates imposed by the Federal Reserve to soften the blow from the pandemic. Banks make much of their money on the difference between interest charged on loans and interest paid on deposits. Near-zero rates crush that gap, known as net interest income.
That key metric of bank profitability fell 4% quarter-over-quarter at JPMorgan and 11% at Bank of America.
Buy analysts are confident the big banks can weather the storm, for now at least. That’s because they were forced after the Great Recession to bulk up on loss-absorbing capital for the next crisis.
For instance, US Bancorp’s mortgage banking revenue more than tripled during the second quarter from the year before.
Gangbusters quarter for Wall Street banks
While banks’ Main Street businesses mostly stumble, the Wall Street side of the industry is cruising.
Morgan Stanley’s revenue jumped 30% during the second quarter to a record $13.4 billion. Goldman Sachs grew revenue by 41%, the second-best quarterly haul in the bank’s history.
Both companies are thriving on a surge of trading activity.
Morgan Stanley’s sales and trading revenue surged 68% from a year ago on “elevated client activity.” Fixed-income trading revenue nearly tripled to $3 billion thanks to “robust global capital markets activity.”
Likewise, Goldman’s fixed-income trading revenue hit a nine-year high, while its equities unit brought in the most revenue in 11 years.
“There was a lot of volatility — and that’s good for business,” said Marinac.
It’s not just that people were trading more.
Yet analysts — and even bankers themselves — warn that the roaring investment banking revenue is unsustainable. Eventually, these trends will flatten out.
Wall Street CEOs aren’t banking on V-shaped recovery
Bank executives, in stark contrast to the euphoria on Wall Street, struck a decidedly cautious tone this week.
“You’re going to have a much murkier economic environment going forward than you had in May and June,” JPMorgan CEO Jamie Dimon said. “We are prepared for the worst case. We simply don’t know. I don’t think anyone knows.”
Wells Fargo boss Charlie Scharf simply said, “The economic recovery will not be smooth.”
All of this suggests the road ahead will be challenging for big banks. Until the real economy gets back on its feet, banks will struggle.