Bank earnings give big bullish signal to investors, showing consumer is flush and spending

Published Sat, Oct 16 20219:43 AM EDT

For some big U.S. banks, the pandemic has already effectively ended. That's what the results and commentary from the companies' third quarter earnings reports show . The six biggest U.S. banks by assets each posted profit and revenue that exceeded expectations this week, fueled by booming Wall Street deals and the release of funds previously set aside for Covid-related defaults. In particular, Bank of America CEO Brian Moynihan stated over and over again on Thursday that whether it was a return to loan growth, credit-card signups, or economic indicators like unemployment levels, the company was back in expansion mode. "The pre-pandemic, organic growth machine has kicked back in," Moynihan told analysts in a conference call. ``You see that this quarter and it's evident across all our lines of business." Given the industry's traditional role as bellwether for the U.S. economy, resurgent bank results are a positive sign for the broader market. Bank stocks surged this year after it turned out that extraordinary government support had prevented the worst possible outcomes feared at the beginning of the pandemic. The industry had set aside tens of billions of dollars for loan losses that never arrived, and the release of those reserves boosted profits this year. But because consumers and businesses were flush with cash, they didn't need to borrow on credit lines, resulting in weak loan growth for the industry. That dynamic shifted in the third quarter, however: Loan balances at Bank of America increased 9% on an annualized basis from the second quarter, driven by strength in commercial loans, the company said. Spending levels that are roughly 20% higher than before the pandemic will eventually result in more credit-card balances, and loan growth should accelerate into next year, JPMorgan Chase CFO Jeremy Barnum told analysts on Wednesday. At JPMorgan, executives are plowing money into credit-card marketing and rewards to capture "our fair share of the growth in spending as we emerged from the pandemic," Barnum said. That means that banks' loan books are set to expand at the same time the industry is still benefiting from reserve releases and historically low default rates. Add in rising rates as the Federal Reserve eases off the accommodative measures taken to stave off an economic collapse, and bank profitability is set to jump. "What's we're hearing from the banks is, let the good times roll," Mike Mayo, the veteran bank analyst who works for Wells Fargo, said in a phone interview. "Whether its loan utilization levels, customer activity or CEO confidence, indicators are pointing in a positive direction." Furthermore, banks' efforts to digitize customer facing roles and automate back office tasks have begun to fundamentally improve their margins, Mayo said. That means that as they continue to add more customers, the profit margins of their businesses will improve — a dynamic that emerged in the third quarter, he said. Other executives were more cautious, however. Goldman Sachs CEO David Solomon said Friday in a conference call with analysts that there is still risk that the delta variant of Covid will surge again; inflation is worrisome; and U.S. political dysfunction or rocky relations with China could slow the economy. But even Solomon was tempted to call the end of the pandemic. "We are likely past the worst of the pandemic's effects on the global economy," he said. "As technology behind the vaccines continues to improve, we will make further progress against the virus." His rival, JPMorgan CEO Jamie Dimon , put it this way: "Two years ago, we were facing Covid, virtually a Great Depression with the global pandemic, and that's all in the back mirror." Become a smarter investor with CNBC Pro . Get stock picks, analyst calls, exclusive interviews and access to CNBC TV. Sign up to start a free trial today .

Brendan McDermid | Reuters

For some big U.S. banks, the pandemic has already effectively ended.