Hundreds of thousands of small businesses are closing for good. Temporary layoffs at larger companies are becoming permanent. But the country’s largest banks, which collectively serve a majority of Americans through loans, credit cards, or deposit services, are not sounding the alarm.
In their earnings reports for the third quarter of this week, the big banks said they are generally prepared for a wave of credit defaults that they expect in the second half of next year. And their own fortunes are looking good: A trade and investment banking bonanza on Wall Street will help them stay profitable.
Some common themes emerged from the reports.
Wall Street is booming
The pandemic has made for a tumultuous year in a variety of markets, but all of the trading investors have made in response has poured the proceeds into the banks.
Goldman Sachs reported strong market sales Tuesday that helped the company generate $ 3.62 billion in profits, well above analysts’ expectations of $ 2 billion. Trading in bond products, which are linked to interest rates, corporate loans, mortgages, and oil and other commodity prices, increased quarterly sales for the bond division by 49 percent compared to the same period last year. In terms of stocks, the divisions’ profits were 10 percent.
In a call with analysts, Goldman executives said part of the boom had come because the company increased its share of trading on behalf of the 1,000 largest money managers in the market and other active traders doing business on Wall Street.
Goldman’s wealth management activities also benefited from a rally in share prices. An increase in the value of his positions in companies like online trading platform BigCommerce (more than 40 percent since the stock started trading in August) and medical device maker Avantor (nearly 30 percent this year) helped the division generate 71 percent more Revenue.
But not only Goldman benefited. Bank of America’s investment banking business posted the second-best performance in its history in the third quarter and was only behind the second quarter of this year, according to the bank’s CFO. At JPMorgan Chase, trading sales rose 21 percent and investment banking sales rose 52 percent year over year.
Customers hold on
The largest banks are arming themselves for widespread defaults from customers unable to pay credit cards, loans or other debts due to the pandemic, and have put huge sums of cash into special pools that they will draw from in the future, to cover losses. But in general, the banks say, their customers are doing better than they expected.
The reason? Bank officials pointed to the trillions of dollars the federal government was distributing in improved unemployment benefits, forgivable small business loans, and other programs created by the CARES bill this spring.
“The latest economic data was more constructive than we expected at the beginning of the year,” said JPMorgan’s CFO Jennifer Piepszak on a call to journalists on Tuesday. “Overall, consumer customers are doing well. They have built up savings compared to pre-Covid levels while reducing debt balances.
In this quarter, the banks put less money aside than in the previous quarters in order to prepare for losses. Bank of America and JPMorgan Chase said their credit card customers would make their payments again.
The bank with the most strained customers appears to be Wells Fargo, which said it spent nearly $ 1 billion helping customers struggling to repay their loans come up with new payment plans to get them ahead of late payments maintain. Even so, the bank said their borrowers are now less likely than they were earlier this year.
More impulses? Do not rely on it
While government aid programs have prevented serious problems in the financial sector so far, none of the banks are looking for further impetus.
When making economic forecasts, each bank takes into account a range of possible outcomes, from better than expected to the end of the world. On Wednesday, Bank of America’s chief financial officer Paul Donofrio said that only one of the scenarios it examined could include more stimulus money. And this model is based on a consensus of the projections of various Wall Street economists; the bank’s internal models do not expect any further relief.
JPMorgan’s economic forecast takes into account the effects of a government stimulus package only until the end of 2020. There are no other incentives in its models for 2021.
The bank’s chairman Jamie Dimon and his colleagues have all warned that the industry is grappling with great uncertainty about the future. JPMorgan could be over-prepared if the economy does better than expected – but a worst-case scenario could still expose the bank to heavy losses.
Although his bank doesn’t expect any further federal relief next year, Dimon said another round of incentives was important.
“There are still 12 million unemployed. There is still a lot of pain and suffering. There are still a lot of small businesses out there that need help, ”he said.
Indeed, calls for more government aid to troubled companies are mounting, even if a dead end in Washington seems unlikely to end with election day approaching.
On Wednesday, a former Goldman Sachs executive, Gary Cohn, who served as President Trump’s economic advisor for a year, urged lawmakers to get a deal quick.
“It’s not a question of politics, it’s about protecting our economy as we know it,” wrote Cohn on Twitter.