Not since before the 2008-09 financial crisis have banks’ earnings been so robust.
After a difficult year, the worst may be over, at least in the US. Record first-quarter earnings results reported by the largest American banks confirm that an economic recovery has started. Bank of America, Citi, Goldman Sachs, JPMorgan Chase and Morgan Stanley surprised with stellar revenue despite the ongoing pandemic.
Not only did their profits in the first quarter more than double compared to the same period last year, but they had returns on equity of up to 30%. Not since before the 2008-09 financial crisis have banks’ earnings been so robust.
The rise in earnings suggests a full economic rebound is within sight, if Wall Street’s biggest banks can be taken as a barometer of US economic health. Adding the ongoing vaccine rollout, a booming stock market and an upcoming $3 trillion federal relief package, hopes are high for a long-term stable upturn.
This “strong performance comes down to policy, both fiscal and monetary,” explains Jesse Rosenthal, head of US financials at research firm CreditSights. “Extraordinary fiscal stimulus clearly flattened the loss curve from the Covid-19 economic shock, reducing the duration and magnitude of the economic crisis and supporting a bullish investor stance, with risk appetite further bolstered by still-low interest rates. That, combined with all the liquidity sloshing around the system, supports markets activity, which is generating significant revenue streams for the banks.”
Dynamic capital markets, soaring investment-banking fees and low credit costs are also contributing to banks’ outstanding performance. The economic revival also allowed banks to release billions from their reserves, initially set aside for the pandemic, thus contributing to greater profits.
A great number of IPOs and mergers and acquisitions also helped—as did a combination of corporate bond issuances, a spike in new mortgages and the boom in special-purpose acquisition companies.
All in all, the future seems bright—and not only for banks. As Federal Reserve Chair Jerome Powell pointed out during an interview with television news program 60 Minutes, a US recovery would also drive a global economic rebound.