- Daily Zen
A first step toward a new normal.
Three major US banks —JPMorgan Chase & Co., Wells Fargo & Co. and Goldman Sachs Group Inc.—reported earnings results for the first quarter of 2021. All three topped Wall Street’s earnings expectations riding on the strengthening economy, a buoyant capital market, and reversal of some bad loans that had previously been set aside during the Covid-19 pandemic.
But the banks are still facing headwinds in the traditional business of deposits and loans. JPMorgan Chase, the largest US bank by assets, beat earnings expectations by 21 cents a share.
A surge in investment banking fees by 57 cents played a hand in its recovery.
But the bank warned analysts that the second quarter might not be able to keep up the momentum.
Goldman Sachs’s earnings improved based on a 73 percent jump in deal-making fees that helped boost return on equity to 31 percent, its highest since 2009 and much better than the 14 percent it promised investors a year ago. “I dare say it (ROE) is unlikely to be as elevated as that,” Stephen Scherr, chief financial officer, told the Financial Times, adding that Goldman’s 14 percent return target remained its “aspiration in terms of consistent performance of the firm”.
Wells Fargo’s revenue for the quarter came in at $18.1 billion, while earnings were $1.05 per share. Compared to last years’s quarterly earnings of $17.5 billion and Wall Street’s expectations for $17.5 billion in revenue and 70 cents in adjusted earnings per share, it did almost a billion-plus better. Strength in mortgages boosted results. Wells Fargo also released $1.05 billion of its loan loss reserves, which further helped its performance earnings.
CEO Charlie Scharf noted that the economy was showing signs of improvement, but, “Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low interest rates and tepid loan demand continued to be a headwind for us in the quarter.”
Strong capital markets have helped most US banks report strong quarterly profits. Still, the combination of near-zero interest rates and an aversion for loans has strangled the traditional banking business. Eric Hagemann, Pzena Investment Management Bank executive, said it is hoped that loan demand will improve in the second half of the year, but cautioned that it could prove weaker than expectations, even as other economic drivers such as consumer spending return to normal. “We’re all waiting for Godot on loan growth to materialize, and when it does it will organically solve a lot of problems for the banks,” said Hagemann.
JPMorgan released $5.2 billion of its loan loss reserves back onto its balance sheet during the first quarter, signaling confidence that the US government stimulus and vaccine rollouts will help the economy further. “We believe that the economy has the potential to have extremely robust, multiyear growth,” said Jamie Dimon, chief executive of the bank.
The volatility of the market is still not over. Goldman is looking for stability with more focus on the consumer business with its Marcus division. But the pandemic and lower interest rates will see the bank garnering profitable returns on its consumer unit only in 2022.
Goldman’s Scherr told the FT the bank had “moderated” the growth of its credit-card lending portfolio during the pandemic but had a “great ambition to grow that portfolio” as the economy recovers. He added that he felt “pretty good about” net interest margins heading into 2021.