Goldman Sachs, JPMorgan Open Bank Earnings Season, Lending Remains Low
Goldman Sachs and JP Morgan post healthy profits, but revenue came in lower than expected due to a decline in loans.
- JPMorgan and Goldman Sachs both beat profit expectations during the second quarter
- Analysts continue to keep an eye on bank lending, which is still far below pre-pandemic levels
JPMorgan and Goldman Sachs kicked off bank earnings season Tuesday with higher-than-expected profits.
JPMorgan reported a profit of $11.95 billion, exceeding analyst expectations. A year ago, the largest bank in America reported $4.69 billion in profit. Revenue however fell 8% from $33.08 billion a year ago to $30.48 billion in the second quarter.
Goldman Sachs also exceeded earnings expectations with $5.49 billion, or $15.02 per share, in profit. Analysts anticipated profits of $10.25 a share.
JPMorgan was among the group of banks that braced for a significant number of loan defaults as a result of the pandemic. The bank set aside $10.47 billion to go toward loan defaults, but when losses were lower than anticipated, $3 billion went back toward its bottom line.
No interest in cheap money
Even as rates were low, major US lenders saw a decline in loans in 2020. Lending has still not risen to pre-pandemic levels.
The looming recession in March 2020 meant that businesses were not taking on debt to expand. Alongside this, Washington doled out stimulus checks to households and businesses and the Fed doubled down on easy monetary policy. Lending was expected to increase in 2021, but there has not been much change yet.
“We know that banks are ready, willing, and able to lend, but is the demand there for it?,” said Brian Jaconsen, multi-asset strategist at Wells Fargo Asset Management during a recent interview with Bloomberg. “What banks have done, effectively, is originate loans that are guaranteed by the government, and what we’d like to see is more risk taking; holding it on their own balance sheets, which can also be higher profit margin loans.”
It would be a strong indicator of economic health and growth to start to see small businesses resume borrowing, Jaconsen said, and he is hopeful that this will start to happen.
“That’s one of the reasons why we’re actually overweight financials in a lot of cyclicals in our portfolios on my team, because we do think that is going to begin to happen so we’re hoping to see confirming evidence of it,” said Jaconsen, referring to the investment strategy at Wells Fargo.
Other analysts are wary of consumer demand, citing increased savings accounts as a result of a lack of pandemic-era spending.
“I think that the consumer is very healthy. In some ways the consumer is so healthy that it’s almost a negative, because loan demand isn’t rising as quickly as we would expect,” said Tom Essaye, founder of Sevens Report Research. “People have a lot of savings, so there’s no reason to borrow if you have the cash.”
Some sectors have seen a rise in loan demand, namely mortgages and auto loans, two areas that have experienced significant price increases in the past year.
JPMorgan reported a 64% increase in home lending and a 61% increase in auto loans. Auto lending reached a record $12.4 billion during the second quarter, according to the bank. Goldman Sachs also noted higher home and auto lending over the quarter and expects overall lending to increase during the second half of the year.
“As the credit environment remains benign, we expect loan growth to accelerate in coming quarters consistent with our strategy to increase lending and financing across the firm,” Jeremy Barnum, Goldman Sachs chief financial officer, said during the bank’s second-quarter earnings call Tuesday.
As inflation worries continue and the Federal Reserve extends its current easy-money policies, it is unclear when lending may pick up.
“Consumer loans are starting to turn up, but commercial and industrial loan books continue to be sluggish,” said Lyn Alden, founder of Lyn Alden Investment Strategy. “I expect relatively flat loan levels over the next quarter.”