Biggest Banks Can’t Keep Up With U.S. Money Printing

Bank of America Corp. is struggling to compete with the money-printing presses of America. 

The bank’s first-quarter results on Thursday showed a 47% increase in net income from the previous three months to $8.1 billion. Much like Citigroup Inc., which just a few hours later posted a record profit thanks in part to a $3.9 billion release from credit reserves, Bank of America benefited from a similar boost to its bottom line as fiscal and monetary support from U.S. policy makers helped to stave off the worst-case scenario for many individuals and businesses across the country. “Credit costs improved and we believe that progress in the health crisis and the economy point to an accelerating recovery,” Bank of America Chief Executive Officer Brian Moynihan said.

However, what’s becoming clear is that the magnitude of the government response to the Covid-19 crisis is causing some difficulties at the largest U.S. financial institutions. Specifically, those like Bank of America, Citigroup, JPMorgan Chase & Co. and Wells Fargo & Co. are finding it difficult to make new loans just as they receive a deluge of deposits. In other words, the core business of banking is being disrupted by U.S. lawmakers and the Federal Reserve. 

At Bank of America, deposits surged 25% to $924 billion, yet consumer banking loans fell 8% to $291 billion. Its total loans and leases as a percentage of total assets declined to 30% in the most recent quarter, down from 40% a year earlier. Citigroup’s loans also slipped by 8% from the prior-year period. As Bloomberg News’s Shahien Nasiripour noted, these figures are consistent with a nationwide phenomenon: Loans and leases declined 8% at the 25 biggest U.S. banks from last year, creating the widest chasm between their capacity to lend and actual lending in 36 years of Fed data.

Unsurprisingly, this trend is squeezing banks’ net interest income, a crucial metric that reflects how much the firms make from customers’ loan payments relative to what they pay on deposits. Bank of America’s $10.2 billion of NII in the first three months of the year barely topped its third-quarter figure, which was the lowest since 2015. JPMorgan’s NII made up just 40% of total revenue, the lowest in at least a decade, and Wells Fargo showed a similar trend. 

For now, this isn’t stopping the largest U.S. banks from churning out record profits. As my Bloomberg Opinion colleague Matt Levine put it, they usually do well when the economy is good and when the market is weird. The latter was definitely true in the first quarter — like Goldman Sachs Group Inc., Citigroup’s equity underwriting fees quadrupled thanks to its dominant position in bringing special purpose acquisition vehicles to market. Bank of America’s sales and trading revenue jumped 17%, beating estimates and allowing the bank to absorb added expenses.

It remains to be seen whether a strong economy backstopped by persistent stimulus will benefit U.S. banks. To be clear, having the government offer forgivable loans to small businesses during a once-in-a-century pandemic makes good sense, as does offering extra jobless payments as Americans grapple with child care and health concerns as they consider returning to the labor force. But there’s little doubt that such measures, along with the Fed’s relentless $120 billion of bond purchases each month, reduce demand for traditional financial institutions. So far, it sounds as if bank executives aren’t willing to loosen their standards to make new loans, perhaps in anticipation that lending will normalize as more Americans receive vaccinations.

All the while, big banks are trying to persuade the Fed to make more permanent changes to the supplementary leverage ratio, which stipulates that they must maintain a minimum level of capital against their assets without factoring in risk levels. The central bank temporarily allowed U.S. Treasuries and deposits at the Fed to be excluded from the denominator, in an effort to allow banks to lend throughout the pandemic. But if they’re struggling to make new loans, and instead are choosing to buy back billions of dollars of shares, it’s hard to sympathize much with JPMorgan Chief Executive Officer Jamie Dimon’s view on the SLR. It’s “more a constraint on the economy than a constraint on JPMorgan Chase,” he said this week, adding that the bank “will be fine either way.”

It’s probably true that JPMorgan will find a way to win no matter what, as will its peers. But at least in the near future, they may need to rely even more heavily on revenue outside of their traditional business of making loans. Citigroup is exiting retail banking in 13 markets across Asia and Europe and working to “capture the strong growth and attractive returns the wealth-management business offers” through hubs in Singapore, Hong Kong, the United Arab Emirates and London, new CEO Jane Fraser said in a statement. If loans remain at these depressed levels, it’ll be worth watching how banks shift their priorities in the U.S. as well.

As I’ve said before, Wall Street banks were determined to be the heroes of this crisis rather than the villains as they were in 2008. By and large, they did what they could to get their customers through the pandemic. They just couldn’t have possibly foreseen the federal government overshadowing them and stepping up in an even bigger way. There’s tremendous power in being a huge financial institution with a war chest of cash. But it pales in comparison to being the monopoly issuer of U.S. dollars.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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