With the largest US banks reporting their second quarter results this week as the second quarter earnings season kicks off, investors have little to complain about.
It is up more than 70% in the past year, double the profit in the same period. This remarkable performance during one of the deepest recessions in US history is a testament to their resilient business models, developed after the 2008 financial crisis.
However, this surprisingly robust performance cannot go on forever as the pandemic-related earnings growth gradually slows as the economic reopening continues.
The big difference will be a substantial drop in the banks' trading revenues, which are expected to see a 28% drop for the top U.S. investment banks according to analyst estimates when they begin reporting results from today. the second quarter.
Citigroup (NYSE:) and JPMorgan (NYSE:) executives have warned ahead of earnings that each of their trading earnings could fall 30% or more from a year ago. That could amount to a loss of about 10% of the total income at each bank.
Credit growth, which has been weak during the pandemic as both consumers and businesses have curbed spending, has yet to pick up. Analysts estimate total lending to commercial banks is likely to have fallen 3% in the quarter. could surprise investors this season. For example, these lenders could free up billions from the reserves they built up during the pandemic to cushion the impact of soured loans.
Banks could report second-quarter earnings per share 40% higher than the same period a year ago, according to analysts at Keefe, Bruyette & Woods, via a Wall Street Journal report. Another factor that could boost earnings this week is a record first half for M&A. This company's sales could see a 30% increase for the industry.
On a slightly longer horizon, we believe the economic background remains favorable for banks. Coupled with massive government spending on infrastructure and a gradual phasing out of monetary stimulus, banks could see demand for credit increase significantly next year as businesses and individuals use up the liquidity accumulated during the pandemic.
Wells Fargo Weekly Chart.
Wells Fargo (NYSE:) and Bank of America (NYSE:NYSE:), both of which reported earnings ahead of opening Wednesday, are well positioned to benefit from loan growth and rising interest rates, two key themes. That's likely to drive bank stocks for the next nine months.
Weekly chart from Bank of America.
Citi, on the other hand, which also reports before the bell on Wednesday, is a good bet to pay higher dividends in the future. It was the only bank from the group of six top lenders last month not to increase its dividend, leaving its quarterly payout unchanged at $0.51 for an annual return of 2.98%, but leaving the door open for an increase.
Five of the six largest banks have already increased their dividends, collectively increasing their payouts per share by 40% from levels they held steady or decreased during the coronavirus-induced economic collapse. They also pledged to buy tens of billions of dollars of their own stock after the Federal Reserve confirmed they were healthy enough to do so.
Starting point
Revenues from some of the country's largest banks could show that the pandemic-driven surge in their sales is already over. That said, the second phase of their earnings growth is yet to come. That should happen when they start to benefit from loan growth and higher interest rates.
