Written by Jackson Joyce
Since the beginning of the COVID-19 pandemic, the American economy has been on a roller coaster. Conditions of the economy have been constantly changing, making future trends difficult to predict. However, some recent events can help shed some light on the current economic conditions in the United States. One such event was the 2021 third-quarter earnings reports for Bank of America, JP Morgan, Citigroup, and Wells Fargo, the top four banks in the U.S. based on total assets. These four banks are the only four in America with over $1 trillion in total assets (Goldberg). The earnings reports allow us to gain a greater understanding of the U.S. economy by giving insight into four major categories: spending, lending, trading, and deals.
Spending
Customer spending for all four banks has significantly increased year over year. In fact, it has eclipsed pre-pandemic levels of spending, which is a strong indicator that consumers are feeling less restrained by the COVID-19 pandemic. Most notably, spending on Citigroup credit cards jumped 20% year-over-year to an all-time record, and spending on JP Morgan Chase credit cards jumped 30% year-over-year (Benoit). Interestingly, customers are paying off their charges on their credit cards in a more timely manner than before the pandemic. This proves that consumers have cash on hand that they have been saving for months during the pandemic and are just now beginning to spend it in significant amounts. However, this is bad for the banks themselves, since they are losing out on revenue from late fees and additional interest from having unpaid balances on customers’ accounts.
Lending
Lending growth was the most underwhelming aspect of the banks’ earnings reports. All four banks reported either no growth or limited growth in outstanding loans. Part of this can be attributed to the large quantities of cash that many companies have been saving up throughout the pandemic, making them less in need of loans. However, the main reason why loan growth is stagnant is that the economy is still fragile and companies are not confident enough to take out large loans. They will likely not be confident until they are sure they can consistently make loan payments. Banks still think loan growth is not far off, but it is difficult to predict when the promised growth will finally be recognized.
The good news, on the other hand, is that a lot of cash that banks stockpiled away during the peak of the pandemic to cover for expected bad loans was released back into the companies in the third quarter. This means that borrowers are paying back their loans at higher rates than banks predicted they would. Banks hope to release more of that stockpiled money in the coming quarters as well.
While lending, in general, has been down, some types of loans have been trending in the positive direction; particularly, securities-based loans, as shown below in the graph displaying Bank of America’s volume in these loans over the past two years (Bank of America). These loans are borrowed against clients’ stocks and bonds portfolios, which give clients lower interest rates, more flexible repayment terms, and, most importantly, tax benefits, since capital gains taxes are only charged on sale of securities.
Trading
Trading reached its highest levels when the coronavirus pandemic was at its worst, largely due to the volatile markets at the time. People were unsure what post-pandemic levels of trading would look like until the top four banks’ third-quarter earnings were able to shed some light on it. The results showed that trading revenue continues to remain high compared to pre-pandemic figures and will likely remain at similar levels in the coming years. Breaking it down into specific types of trading reveals that equities trading remains at the highest levels it reached during the peak of the pandemic, while fixed income revenues are declining.
Deals
One of the largest drivers of revenue growth for the top four banks outside of releasing bad-loan reserves was from advisory fees. Companies around the country and world are looking to expand their product offerings, acquire more customers, and meet consumer demand. They are doing this through mergers, acquisitions, leveraged buyouts, and other deals. The fact that so many companies are willing to undertake such significant deals shows that they have faith in the direction of the economy; they think consumers will continue to spend more in the coming years, so they want to expand now to be able to meet consumer demand for years to come. The graph of JP Morgan’s fee revenue below shows just how much it increased in the third quarter.
This trend is especially prominent in the banking industry itself. Over the past decade, regional banks have focused on acquisitions that were primarily for the purpose of increasing their technological capabilities. The companies they acquired were generally younger, fintech companies that did not dramatically change the banks in the short term. However, regional banks are now looking to acquire other regional banks, resulting in a consolidation trend in the industry. They are doing this for several reasons. Most importantly is to increase their efficiency to be able to compete with larger banks. Also, the opportunity to gain the digital capabilities of the bank being acquired is important given that fintech companies are becoming harder to find and more expensive to acquire. The banks advising these transactions are typically the largest financial institutions, especially Bank of America, JP Morgan, and Citigroup, helping to drive their fees revenue.
Conclusion
The top four banks’ 2021 third-quarter earnings show confidence in the economy. While many businesses and individuals may still be hesitant to take out loans, consumers are spending more and businesses are performing many large and transformative deals. The economy may still be fragile from the pandemic, but it is showing signs of improvement, which will hopefully continue in the coming months and years.
Works Cited
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Benoit, David. “JPMorgan’s Jamie Dimon Says Pandemic Is Moving to the Rearview Mirror.” The Wall Street Journal, Dow Jones & Company, 13 Oct. 2021, https://www.wsj.com/articles/jpmorgan-profit-jumps-on-reserve-release-11634123662?mod=series_bankearnings.
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