As the U.S. economy continues to recover from the COVID-19 crisis, the nation’s largest banks are hoping for a robust bounce back in loan growth in the coming quarters.
In earnings reports covering the three months ended June 30, the four largest banks failed to substantially grow their loan books, instead turning to non-interest sources of income like investment banking to grow revenues.
At JPMorgan Chase (JPM) and Citigroup (C), loans were little changed compared to the same quarter last year. At Bank of America (BAC) and Wells Fargo (WFC), average loan and lease balances were down 11% and 12% respectively, compared to the same quarter last year.
But the nation’s top bankers say green shoots are emerging for loan growth in the near future.
"We talk about loans being down. The consumer — the pump is primed,” JPMorgan Chase CEO Jamie Dimon told analysts on Tuesday. “The consumer, their house value is up, their stocks rise up, their incomes are up, their savings are up, their confidence are up."
Bank of America CFO Paul Donofrio similarly said he expects loan growth to return, noting that loan and lease balances at his bank increased on a quarter-over-quarter basis.
“We think this was the quarter where you saw the evidence that we were all looking for that loans are going to start growing,” Donofrio told reporters Wednesday morning.
For the banking industry, which relies on loans to generate interest income, the lack of loan growth meant that other banks had to turn to other revenue streams to drive earnings in the second quarter.
Wells Fargo, for example, turned to its affiliated venture capital and private equity businesses to drive a 37% increase in its non-interest income. Shares of Wells Fargo were the only big bank stocks trading positive in the market session on Wednesday.
The major banks also got a financial boost by releasing allowances for credit losses, reserves that the industry built up to absorb the potential shock of borrowers being unable to pay their debts. With the economic rebound underway and the losses less severe than expected, banks are continuing to release those reserves.
At Citigroup, those releases cheapened the cost of credit to allow the company to deliver estimate-beating revenue. On the bottom line, stock buybacks helped improve Citi’s earnings per share figures.
But Mike Mayo, a bank analyst at Wells Fargo, said loans will ultimately be the story for the banking industry over the near-term. Arguing that the pace of investment banking momentum will likely slow, Mayo said consumer credit products like credit cards could pick up at banks like JPMorgan Chase.
“Loan growth will return. It's not a matter of if, just when,” Mayo told Yahoo Finance on Tuesday.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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