Big Banks Reveal Huge Gap Between Main Street and Wall Street

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This gap in the banking sector reflects the bifurcated rebound in the United States of the pandemic.

The stock market has largely recovered from the crisis and companies are raising record amounts on the capital markets. But the real economy is still in crisis. Millions of Americans are unemployed, countless small businesses are on the verge of collapse, and corporate bankruptcies are increasing.

“Time is the killer in all of this. The longer this pandemic continues, the worse it gets, “said Chris Marinac, banking analyst and director of research at Janney Montgomery Scott.

The $ 31 billion boosted bad debt war chest

The big banks are predicting the worst by increasing the cushions against bad debts.

JP Morgan (JPM), Bank of America, Wells Fargo, Citi (C), PNC and US Bancorp (USB) set aside $ 31.1 billion in loan loss provisions in the second quarter. Although prudent, these measures have taken a heavy toll on profits and reflect the feeling that more problems in the real economy are coming.

“Bankruptcies continue to increase. The job market is under continuous tension. It won’t end any time soon, ”said Constance Hunter, chief economist at KPMG.

Bank of America (BAC), for example, has set aside an additional $ 4 billion to protect against loans that go bad because of the “weaker economic outlook associated with COVID-19”. These credit losses caused a 52% drop in Bank of America’s profits.

PNC (PNC) increased its reserve for loan losses by $ 2.5 billion, which resulted in a loss for the supraregional bank based on continuing operations.

“We are still in the middle of the storm. The banks are determined to get ahead, ”said Marinac.

Low rates mean low profits

But it is not only the growing reserves of loan losses that are hitting the banks.

They are also stuck with the extremely low interest rates imposed by the Federal Reserve to soften the blow of the pandemic. Banks make a lot of their money on the difference between interest charged on loans and interest paid on deposits. Rates close to zero reduce this gap, known as net interest income.

This key measure of bank profitability fell 4% quarter-over-quarter at JPMorgan and 11% at Bank of America.

Wells Fargo’s (WFC) net interest income fell 13% because the bank is still under Fed sanctions for its countless consumer abuses. These Fed sanctions cap the size of Wells Fargo’s balance sheet, preventing the bank from offsetting the pressure of low rates by lending more.

Purchasing analysts are confident that the big banks can weather the storm, at least for now. In fact, after the Great Recession, they were forced to pool their capital to absorb losses for the next crisis.

And one of the bright spots in Main Street activity is housing, which is boosted by record mortgage rates and the desire of many city dwellers to move to the suburbs.

For example, US Bancorp’s mortgage banking revenues more than tripled in the second quarter of the previous year.

Gang Street Clusters for Wall Street Banks

While most of the banks on Main Street are stumbling, the Wall Street area is booming.

Morgan Stanley sales jumped 30% in the second quarter to a record $ 13.4 billion. Goldman Sachs increased its revenues by 41%, the second best quarterly quarter in the bank’s history.

Both companies are booming in commercial activity.

Morgan Stanley sales and trading revenues jumped 68% from a year ago due to “high customer activity”. Revenues from fixed income transactions almost tripled to $ 3 billion due to “robust activity in the global financial markets”.

Similarly, Goldman’s fixed income trading income peaked in nine years, while its equity unit generated the most revenue in 11 years.

“There was a lot of volatility – and it’s good for business,” said Marinac.

It is not only that people are exchanging more.

The Fed’s emergency actions, including its unprecedented promise to buy junk bonds and other corporate debt, opened up capital markets after they closed in March. American companies raised nearly $ 190 billion from the sale of stocks in the second quarter – more than ever before, according to Dealogic.

This type of transaction is music to the ears of Wall Street banks, who are paid to undergo IPOs and other sales of stocks and bonds. Goldman Sachs (GS) reported record revenues for sales of debt and equity securities.

Of course, solid capital markets have not only benefited Goldman and Morgan Stanley (SP). They helped cushion the credit losses of the most diversified large banks. For example, JPMorgan’s merchant and investment bank announced an 85% jump in profits from record earnings. Its trading activity also grew strongly, with a peak of 99% of bond trading revenues. Without booming markets, JPMorgan’s profits would have fallen further.

Yet analysts – and even the bankers themselves – warn that the roaring revenues from investment banking are unsustainable. Ultimately, these trends will stabilize.

Wall Street CEOs don’t bank on V-shaped recovery

Bank executives, in stark contrast to the euphoria of Wall Street, took a decidedly cautious tone this week.

Jennifer Piepszak, chief financial officer of JPMorgan, said the bank was poised for double-digit unemployment in the first half of next year. The Fed, meanwhile, projects unemployment to fall to 9.3% in the fourth quarter of this year.

“You are going to have a much more troubled economic environment in the future than in May and June,” said JPMorgan CEO Jamie Dimon. “We are ready for the worst case. We just don’t know. I don’t think anyone knows. ”

Wells Fargo boss Charlie Scharf simply said, “The economic recovery will not be smooth.”

All of this suggests that the road ahead will be difficult for the big banks. Until the real economy gets back on its feet, the banks will struggle.

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