Consumer Spending, Low Credit Card Delinquencies Lifts Big Bank Earnings

If there’s one universal theme thus far across bank earnings, across banks large and small, investment banking juggernauts and more retail-oriented firms … it’s that the consumer has remained remarkably resilient.

At the time of this writing, a slew of names in financial services, such as JPMorgan, Bank of America, Wells Fargo and others, have reported results that show a continued upswing in debit spending, even if credit spending remains relatively muted.

Wall Street’s eyes may be, as usual, focused at least in part on Wall Street. And it’s true that banks like JPMorgan, with firm roots on the Street, had strong showings in those segments. By way of example, in the first quarter, JPMorgan’s equities trading revenues stood at $3.3 billion, up 47 percent year on year.

Goldman Sachs’ own record first-quarter results showed that investment banking took in $3.8 billion up 73 percent from Q1 2020. Revenue from initial public offerings (IPOs) and special purpose acquisition companies (SPACs) quadrupled to $1.6 billion.

The Consumer Tells A Tale 

But drill down a bit, and it is the consumer that emerge in what might be argued is the “story of the day.”

Start, then, with the reserve releases. As has been chronicled through past earnings seasons, banks took tens of billions of dollars in reserves tied to anticipated loan losses, girding themselves for the worst, in terms of economic hardship, amid soaring unemployment and shuttered economies. That rationale was and is simple: As paychecks stopped rolling in, as household incomes were sharply reduced, individuals and families would triage their loans and credit card debt, perhaps devoting resources to the mortgage, for example, while letting credit card payments lapse.

Releasing The Reserves 

But a funny thing happened on the way to disaster. The disaster didn’t happen. The repeated waves of stimulus payments, enhanced unemployment benefits and Paycheck Protection Program (PPP) loans helped improve the savings picture, and by extension, helped more people tackle their day-to-day financial responsibilities relatively uninterrupted.

Thus, JPMorgan released $5.2 billion of reserves; Wells Fargo logged a pre-tax reduction in its allowance for credit losses of $1.6 billion; and Bank of America did the same to the tune of $2.7 billion.

We’re not out of the economic woods yet: JPMorgan’s CFO said on the conference call with analysts that there still remain uncertainties about the pandemic, and, specifically, the virus variants. Many of these banks are still maintaining at least some of their reserves — and we speculate that through the next few quarters we’ll see additional releases into earnings.

Granular details on spending habits show that consumers remain in deleveraging mode (Wells saw average loans down 8 percent year over year), but are seemingly sanguine when it comes to spending.

Wells Fargo, for instance, showed 6 percent growth in credit card spending, far outpaced by 20 percent growth in debit card spending (at $108.5 billion purchase volume).

Spending what you have ties in, too, with comfort in knowing what’s in the bank (literally), and accounts are growing at the banks. In a snapshot, Wells Fargo showed that it had $789.4 billion in average deposits, up 21 percent year on year. Bank of America’s consumer deposits grew by 25 percent year on year, and debit spending was up 22 percent.

And though Goldman may have the reputation as a Wall Street titan, its consumer and wealth-management division, which includes its Marcus consumer bank (which reportedly has more than $100 billion in deposits), rose 16 percent to $1.7 billion.

For banks, then, the top and bottom line tailwinds are proof positive that the consumer (and by extension, retail banking) is here to stay — and frankly, never left.

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