With earnings soaring, Wall Street banks see economic boom ahead

Strength in the banks' investing, lending and trading businesses added to the euphoria

New York

THE mood on Wall Street is decidedly jubilant.

Just a year ago, as the coronavirus raged across the country, the nation's largest banks were anticipating economic devastation. They set aside billions of dollars to gird against the huge losses that could follow, as record numbers of people lost their jobs, office buildings emptied out and small businesses closed.

It's an entirely different story today. On Wednesday, executives at Goldman Sachs, JPMorgan Chase and Wells Fargo delivered a bullish economic forecast. They said that consumers - their wallets padded by stimulus money - are itching to spend and companies are rushing to expand by buying or building new businesses, as the United States emerges from the COVID-19 pandemic.

"It is clear to me that the US is poised for a strong recovery this year, led by consumer spending that is rebounding to pre-Covid levels," David M Solomon, chief executive of Goldman Sachs, told analysts on a conference call. "This sentiment is reflected in the capital markets."

Jamie Dimon, his counterpart at JPMorgan Chase, the country's largest bank by assets, took a similar view. "We believe that the economy has the potential to have extremely robust, multi-year growth," Mr Dimon said in a statement. He attributed his outlook to government spending on stimulus and infrastructure, supportive policies from the Federal Reserve and high hopes for the end of the pandemic.

This all bodes well for banks, which began reporting their quarterly earnings this week. On Wednesday, Goldman and JPMorgan reported profits roughly five times as high as in the first three months of 2020, thanks to a combination of strong business results and a reduction in the amount of money they had put aside to cover losses on loans. Wells Fargo reported profits that were seven times as high.

Mike Novogratz, a veteran trader who runs a financial firm focused on cryptocurrencies, called the bank results "a testament" to what happens when there's as much readily available money to invest "in the system as we have". He predicted an imminent pickup in travel, entertainment, socialising and investing that would be reminiscent of the Roaring Twenties. He said investors should thank the Federal Reserve chairman, Jerome Powell, for taking steps to support the economy, such as purchasing financial assets and keeping interest rates low.

There are enough sobering signs to temper Wall Street's optimism. Infections and hospitalisations are still climbing in some areas of the country, even as the vaccination rollout gathers steam. The recent decision to pause the one-shot vaccine offered by Johnson & Johnson - one of three vaccines approved by the US - and the reluctance of as many as one in four Americans to be inoculated, could slow the country's march towards herd immunity. And the trends benefiting large banks have not reached Main Street businesses, many of which are still struggling. Moreover, the recovery is likely to be uneven, hurting those who were struggling before the pandemic more so than those who held on to steady jobs.

But for the banks that reported results Wednesday, the balance of evidence clearly tilts towards improvement. Bank earnings this quarter reveal "a dramatic shift, if you will, from an unprecedented downdraft in growth over the course of Covid and now in effect, a dramatic V-like pickup in what's happening to the broader economy", said Stephen Scherr, Goldman's chief financial officer.

Expectations for that pickup were reflected in moves by all three banks to reduce the cushion they had set aside at the start of the pandemic to withstand continued losses from credit cards, mortgages and other loans they had made. JPMorgan released US$5.2 billion of that credit cushion, and Wells reduced its cushion by US$1.6 billion. Wells also noted that charge-offs - cases where the bank declares that it won't be able to collect on a delinquent loan - were at a historic low. Goldman, a far smaller player in the consumer business, also reduced what it had set aside by about US$200 million.

Strength in the banks' investing, lending and trading businesses added to the euphoria. All three reported robust revenues across multiple lines of business, driven by a combination of active and rising markets, a flurry of new mortgage activity and the boom in special-purpose acquisition companies, or SPACs. Corporate merger and acquisition activity also marked an all-time high by dollar value.

Goldman - a dominant player in corporate advisory services and in markets - reported a doubling of revenue to US$17.7 billion, from US$8.7 billion, thanks to double-digit percentage gains in investment banking, money management and markets. JPMorgan reported a 14 per cent rise in revenue to US$33.1 billion from US$29 billion, driven by both markets and investment banking.

Wells Fargo's revenue rose 2 per cent, buoyed partly by a 19 per cent jump in home lending, as Americans migrated away from cities and into more suburban or rural areas. The results "reflected an improving US economy", but low interest rates and sluggish demand for loans were a "headwind", said Charles W Scharf, the bank's chief executive.

The banks have been major - if somewhat unintended - beneficiaries of the government's spending push over the past year that sought to keep the shock of virus-related shutdowns from sending the economy into a long-term tailspin.

A little more than year ago, the Federal Reserve cut interest rates to near zero and restarted its bond-buying programmes, effectively injecting trillions of freshly created dollars into financial markets, which helped bolster activity in mortgages, corporate bond issuance and deals.

Since then, stock markets have soared more than 80 per cent, amid a boom in trading that crested this year. Both factors helped banks, which have businesses that buy and sell shares for clients. Goldman's equities business made US$3.7 billion in revenue in the first quarter, up 68 per cent from last year. JPMorgan's stock markets business notched US$3.3 billion, up 47 per cent.

Looking forward, several banks spotlighted the impact of recent infusions of stimulus checks on consumer accounts - a component of roughly US$5 trillion the federal government has allocated to fighting the crisis over the past year. The influx of federal dollars has helped put the finances of US households on some of their firmest footing in years, bankers said, adding that there are growing indications consumers are eager to put the cash to work.

"We're seeing increased consumer spending activity in both travel and restaurants, two categories that have been particularly suppressed since the onset of Covid-19," Mr Scharf of Wells Fargo said on a call with analysts, spotlighting that in the week ending April 2, travel-related spending on debit cards was up 422 per cent compared with the same period in 2020. JPMorgan also noted growing momentum on spending on travel and entertainment, which was up 50 per cent in March compared with February.

"There's no question that there is meaningful consumer pent-up demand," Mr Solomon, of Goldman Sachs, said on a conference call with analysts. NYTIMES


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