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Big US bank earnings outperform, but growth concerns prevail

For the second quarter in a row, big bank earnings reports that delivered solid beats to analyst forecasts got a sour reception from investors.

Shares at three of the Big Four U.S. banks sold off on the days they posted results, with markets appearing to look for signs of a stronger bounce in lending volumes that have been stagnant for months.

There was a lot of good news from the banks. Negative credit provisions once again handily exceeded consensus expectations, and Wall Street profit engines were still running hotter than before the pandemic even after a normalization in trading revenues that executives had telegraphed.

"They're making decent money. They're releasing credit reserves," said Mark Doctoroff, co-head of MUFG's global financial institutions group. But "a lot of this stuff was baked in already in the stock prices." The recent softness in bank stocks has followed a strong rebound from early pandemic lows in 2020.

A sticking point is that banks' core earnings from taking deposits and lending have shriveled. Net interest income across the Big Four in the second quarter was down 5.7% to 11.0% from the year prior and down 11.5% to 27.2% from two years prior.

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Bankers have made the reasonable argument that loan growth is closely tied to economic growth over the long term, but it remains unclear how quickly the relationship might reassert itself coming out of the pandemic. And it could take a rise in short-term interest rates for earnings from big banks' huge pools of low-cost deposits to really take off.

JPMorgan Chase & Co.'s most recent interest rate sensitivity disclosure gives an estimate that a 100-basis-point increase in the yield curve would increase annual net interest income by $6 billion, with $4.4 billion of the lift coming from the short end. Similarly, about 70% of an $8 billion lift at Bank of America Corp. would come from the short end, CFO Paul Donofrio said on the bank's earnings call.

On the near-term outlook for loan growth, the big banks emphasized different messages, although there was not too much variance in second-quarter trends. At JPMorgan Chase, average gross loans were up 1.1% and period-end gross loans were up 2.9% sequentially, and CFO Jeremy Barnum said it is "going to be a little bit of a slog through the rest of this year."

At BofA, average gross loans held for investment were about flat sequentially and up 1.8% as of the end of the period. Donofrio said the period represents a turning point, and that a return to last year's commercial line utilization rates would mean $45 billion of growth alone. However, Chairman and CEO Brian Moynihan said it could take another six months for bottlenecks at shipping ports to clear up.

Some of the growth in period-end loans also reflected spending by credit cardholders who tend to pay off their balances every month, and banks said borrowing by cardholders who tend to carry balances from month to month — and pay interest on the debt — has remained tepid so far.

Donofrio said the recent decline in long-term interest rates means it will be "hard to get" to BofA's previous guidance that net interest income could be about $1 billion higher in the fourth quarter of 2021 than the first quarter of the year.

Wells Fargo & Co. stood out with a 4% gain in its shares on the day of its report, compared with a 0.4% decline in the SNL U.S. Bank and Thrift index. The bank's period-end gross loans held for investment slipped 1.1% sequentially to $852.30 billion, and it said it would be at the low end of its previous net interest income guidance for the year even with some growth on the commercial side.

But executives also said progress it has made cutting expenses and a large share repurchase plan have put its first-order target of a 10% run-rate return on tangible common equity in reach for 2022. The guidance appears to burnish the bank's profile as a recovery story.

"We like the stock as [Wells Fargo] is currently an under-earning franchise priced at an 11% discount to peers" based on earnings estimates for 2023, Keefe Bruyette & Woods analyst David Konrad said in a note after the bank posted its results. Wolfe Research analyst Steven Chubak was also positive in a note, saying he was "very encouraged by management's commitment to achieving 10% ROTCE as early as 2022."