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In Q2 earnings, big banks talk up consumer strength


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In Q2 earnings, big banks talk up consumer strength

Big U.S.banks remain hungry for higher interest rates, but in the meantime, several majorlenders said they are benefiting from a strengthening consumer-driven domestic economythat is fueling loan demand and helping to keep credit quality solid.

Persistentlylow rates — with no clear signs of change — cutinto prominent banks' second-quarter profitability. But consumer confidence is gatheringmomentum and driving loan demand, bankers say. Higher levels of loans are helpingbanks at least mitigate the impact of low rates. As loan books swell, banks generateinterest income via volume.

Averageloans were up 11% from a year earlier in JPMorganChase & Co.'s consumer and community banking division, for example.CFO MarianneLake told analysts during a callto discuss earnings thatthe New York-based banks' consumer businesses are "firing on all cylinders,"producing "robust loan growth across all businesses." She added that "credittrends across the consumer businesses continue to be favorable."

Thatkind of result is welcomed news, said Sam Pappas, presidentand CEO of Mystic Asset Management Inc. With interest rates continuing to hoveraround historic lows, as they have since the 2008 recession, and with the globaleconomy vulnerable amid slowdowns in Asia and political tumult in Europe, he saidAmerican financial giants need a strong domestic economy to power loan growth and,ultimately, earnings in their commercial banks.

"We'rethe best neighborhood in an otherwise crappy environment," Pappas said in an interview.

The big U.S. banks have made notable strides in bringing down expensesand containing credit costs in recent years, he said. And JPMorgan and others withbig investment banks were able to capitalize on market volatility to boost tradingrevenue in the second quarter. But banks can only cut costs so much, Pappas noted,and trading revenue is often unstable, making it hard to rely upon from quarterto quarter.

As such, Pappas said, higher interest rates would be a boon to bigasset-sensitive banks this year. Absent that, solid loan growth that reflects ahealthy U.S. economy is vital. That helps banks bolster top lines, and the economicmomentum, if it continues, could influence Federal Reserve policymakers to liftinterest rates later this year or early next, setting up lenders for 2017.

"Ithink there is a chance of that," Pappas said.

Commentaryfrom other banking behemoths so far during earnings season seems to support thatthinking.

At , where lowrates crimped second-quarter earnings,executives were nevertheless positive about consumer and economic vitality. TheSan Francisco-based bank said its average loans grew 9% from a year earlier as netcredit charge-offs remained near historic lows.

Chairmanand CEO John Stumpf told analysts during an earnings call that, after sub-2% GDP growth in the final quarter oflast year and the first quarter of 2016, Wells is looking for economic expansionto come in at about 2.5% for the second quarter.

"Mostof the improvement came from consumers, where drivers were broad-based," Stumpfsaid. "Spending on big-ticket items was especially robust, and sentiment surveysshow that consumer confidence remains strong."

Chairman and CEO Richard Davis also soundedan upbeat tone after reportingthat the Minneapolis-based bank grew average loans more than 8% from a year earlier.

"Onthe consumer side, we are seeing all areas moving slowly but surely and nicely favorably,from autos to RVs to credit card to home equity," Davis said during an earningscall.

Ken Mayland, president of ClearViewEconomics, said in an interview that if the jobs market remains on solid ground,consumers likely will continue to power the economy in the second half of this year.

"It'sa picture that is holding together pretty well," Mayland said. "Jobs growth continues to addto decent incomes and that leads to decent levels of money spent, which is whatwe need."

He saidhe would not be surprised if second-quarter GDP growth was "north of 3%."That, he added, would likely motivate Fed policymakers to at least begin lookinganew at rate increases.

"Ithink it could be a pretty solid number," Mayland said. "We are in pretty decent shape."