(NYTIMES) - The United States' biggest banks are about to report windfall profits as customers increase their spending and the economy bounces back from the Covid-19 pandemic.
Profits for behemoths including JPMorgan Chase and Goldman Sachs are expected to jump when they report second-quarter results this week. Their Wall Street divisions have been able to cash in on a red-hot market for deals, while the banks' Main Street units benefited as customers went back to work and opened their wallets.
And some of the gains will be the result of money they already had: The banks are paring down the rainy-day funds they set aside earlier in the health crisis to prepare for a dreaded wave of defaults that has not materialised.
"Government relief efforts and forbearance provided by banks appear to have served as an effective bridge for borrowers," Mr Nathan Stovall, an analyst at S&P Global Market Intelligence, wrote in a report to investors. "Now, many consumers and businesses are on solid footing as Covid-19 vaccinations allow economies to reopen."
Investors will take cues from top bankers about the state of the economy. Chief executives at the largest US banks have become increasingly bullish this year as a speedy vaccine roll-out helped Americans emerge from the torpor of the coronavirus outbreak.
"My gut tells me this economy is recovering faster, inflation is moving quicker, and it may not be quite as transitory as we all think," Mr James Gorman, CEO of Morgan Stanley, told CNBC last month. That may mean the Federal Reserve needs to raise interest rates earlier than markets are expecting, he said.
The shifting pace of the rebound has caused some turbulence: Bank stocks that surged as the reopening gained speed have fallen 7 per cent in the past month, and investors in the bond market are worried that growth is slowing from its previously breakneck pace. Executives will probably be quizzed about inflation and what would happen to financial markets should the Fed curtail its enormous bond-buying programme sooner than once expected.
The uncertainty that is depressing bank stocks will probably dissipate, said Ms Susan Roth Katzke, an analyst at Credit Suisse. She forecast a rally of about 20 per cent in some of their shares in the next six to 12 months. They will be fuelled by an accelerating recovery, prospects for rising interest rates and increasing loans, she wrote in a note to investors.
But the mixed economic picture has clouded the outlook for borrowing, which is crucial to the banks' ability to earn money from interest payments.
"The big topic that everyone is focused on is loan growth," said Mr Kush Goel, senior research analyst at Neuberger Berman. Even with the economy expanding quickly, businesses are not borrowing quite as much as expected, he said.
Investment-banking divisions are likely to shine in this week's results. Wall Street dealmakers are still profiting from a bonanza in mergers, acquisitions, initial public offerings and so-called blank-cheque special purpose acquisition companies that started in 2020. Traders, however, will probably post results that are less eye-popping than last year, when the virus set off huge waves of volatility and client activity.
Some firms may provide more details about exactly how they will share some of that wealth.
Morgan Stanley and Wells Fargo were among the banks that said in June they would increase dividends and buy back more of their stock. The banks moved to return money to shareholders after passing the Fed's annual stress test, which was the final hurdle to ending temporary restrictions on payouts. Collectively, JPMorgan, Bank of America, Wells Fargo and Morgan Stanley have announced they will repurchase US$85 billion (S$115 billion) in shares.
Investors will also look to return-to-office plans by banks - bulwarks, as they are, of the New York City economy and major employers worldwide - as an early barometer for corporate America. Goldman Sachs and JPMorgan have taken a more aggressive approach to getting staff back to their desks, while Citigroup signalled it would be more flexible. Investors will closely watch how the varying approaches take shape.