Big Banks Poised to Show Return of Long-Elusive Loan Growth

(Bloomberg) -- The loan growth that eluded large U.S. banks for most of last year is expected to finally make an appearance as lenders begin to report results Friday, in a sign the economy is making more progress in recovering from the pandemic.

Federal Reserve data compiled by Bloomberg show that loans at the 25 largest banks were 3.5% higher at the end of December than they were a year earlier. That’s clear improvement from the end of the third quarter, when the same comparison was flat. Still, the highly contagious omicron variant of Covid-19 has taken hold in recent weeks, with the potential to undo those gains.

“I think period-end loan growth will be solid,” Jason Goldberg, an analyst at Barclays Plc, said in an interview. “While 2021 was mostly subdued, you look at some of the data from the Fed and you saw a pretty nice pickup into the end of the year.” 

Loan growth has been a particular focus for investors because lagging demand among borrowers, normally a bad sign for banks, is being chalked up to waves of government stimulus tied to pandemic lockdowns that’s now winding down. But even without their lending business firing at peak capacity, U.S. banks have been turning in record earnings throughout the pandemic.

“Loan growth was low because people had a lot of money, were able to pay off some of their” credit cards and other borrowings during the pandemic, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said in an interview with Fox Business earlier this week. “You’re going to see banks reporting loan growth numbers, and they’re going to be better now than they were a quarter ago, but that’s the outcome of a growing economy.”

JPMorgan reports results first on Friday, followed by Wells Fargo & Co. and Citigroup Inc. Next week comes Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley.

Other key topics to watch in fourth-quarter earnings:

Investment Banking

Investment-banking revenue at the five biggest firms probably climbed 15% in the fourth quarter from a year earlier, according to analyst estimates compiled by Bloomberg. Fees from advising on mergers and acquisitions will give the figure a boost after global transaction values reached a record last year. 

Goldman’s dealmakers took the top spot in terms of market share, while JPMorgan ranked second and Morgan Stanley third.

Trading, on the other hand, could fall 5% across across the industry. Executives at the biggest trading shops have cautioned that the record results posted in 2020 are unlikely to be replicated, given quieter volatility levels. They’re instead predicting a continuing “normalization” of the business. 

Inflation

JPMorgan President Daniel Pinto last month called inflation the “most important issue at the moment.” He said the most likely scenario is that Fed actions and components pushing inflation up, such as supply-chain issues, are going to converge in a way that will help the economy avoid a recession. 

Executives’ comments on inflation, and how it may already be affecting their bottom line, are likely to be a key focus. A smooth normalization of interest rates will spur dealmaking, but volatile and disruptive rate increases will be a recipe for some market pain, Pinto said last month. 

An increase in consumer prices bolstered expectations that the Fed will begin raising interest rates in March to tame inflation. The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, according to Labor Department data released Wednesday. 

Reserve Releases

Banks set aside tens of billions of dollars for potentially soured loans at the start of the pandemic, and then released much of that last year after those losses never materialized. The reserve releases padded earnings throughout 2021 -- a trend that’s expected to continue in the fourth quarter, albeit on a smaller scale. 

“Asset quality remains really, really benign, so we expect losses to remain at historically low levels,” Goldberg said. “Certainly loan-loss reserve releases will continue to abate, in part because you have loan growth, which is a good thing.”

2022 Outlook

The biggest banks have already warned that their expenses will probably go up this year, and investors will be keen for more details. Firms have been opening their wallets to keep workers happy amid a talent war, first with more pay for junior bankers and now with higher bonuses. 

Revenue forecasts are also key as the Fed begins its rate-hike efforts. Wall Street operations have been a boon for big banks for the past two years, first in trading and then in investment banking. It remains unclear whether there’s room for that to continue. 

“It’s all about the forward look,” Credit Suisse Group AG analyst Susan Roth Katzke wrote in a note to clients, citing the benefit of rising interest rates, loan growth and the “degree of sustainability of market-related revenue momentum.”

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