As big bank profits rise, analysts and investors will likely have to continue to expect significant loan growth, which will translate into higher net interest income (NII) and therefore higher profits. This is no surprise, given what bank CEOs said at industry conferences in the second quarter.
Banks are seeing spending rebound, but this has yet to translate into strong lending growth. Consumers are bursting with cash from savings and stimulus packages, and businesses are still not ready to pull the trigger on new inventory spending and other investments.
Despite the delay, Bank of America (NYSE: BAC) sees promising signs of a pickup in loan growth in the second half of the year, and management also appears optimistic.
What happened to loan growth in the second quarter
In the second quarter, Bank of America saw its end-of-period loans increase 2% from the first quarter of 2021 to around $ 916 billion. But average loans and leases, which are more of a driver of the NII, remained stable compared to the first quarter of the year. The NII was also stable compared to the first quarter of the year.
There were a few bright spots mixed with the lack of growth. On the one hand, average loan and end-of-period loan balances have remained stable or increased, even though Paycheck Protection Program (PPP) loans have been canceled and these balances have declined over the course of time. of the quarter. In addition, the bank saw commercial, credit card and residential mortgages start to climb in the second quarter.
Bank of America’s Global Markets division loans jumped 14% from the first quarter, while loans from the bank’s global wealth management and investment division were up 4% from Q1. first trimester. But the bad news is that the use of commercial lines of credit remains very low and consumers continue to prepay their loans at high rates. Long-term interest rates – like those on 10-year Treasuries, to which many loan yields are tied – also fell in the second quarter, lowering the NII.
The good news is that Bank of America CEO Brian Moynihan has said that while it’s not substantial, almost all of the bank’s various businesses have seen some lending growth. Moynihan also said that he doesn’t think the use of lines on the commercial side can really go down, as it still operates in the low 30% range, which is up to 10% lower than using lines. normally in some segments. In business banking, which serves businesses that earn between $ 5 million and $ 50 million in annual revenue, Moynihan said loans are finally growing on a net basis after being stranded for several quarters.
Another good news is that Bank of America’s management team also successfully predicted that NII would bottom out in the third quarter of 2020. And while the bank still expects greater growth, it has managed to maintain NII despite a lot of volatility. and lower long-term rates.
Finally, despite the difficulty of long rates, management has not abandoned its NII outlook for the entire year. In the first quarter, Moynihan said that modest loan growth and continued improvement in long-term rates and a steepening of the yield curve, in which long-term interest rates rise while interest rates rise. Short-term interest stays low, could result in a $ 1 increase in NII. billion of the $ 10.3 billion generated by the bank in the first and now in the second quarter.
Bank of America CFO Paul Donofrio said that even though the goal is now more difficult to achieve, it is still possible if loans continue to rise and long-term rates do not fall from d ‘here. Donofrio added that the bank may decide to put additional excess cash in securities to help this mission.
On the other hand, JPMorgan Chase has already reduced its NII forecast for the year from $ 55 billion to $ 52.5 billion, although the bank has made it clear that it is storing cash and not reinvesting in securities at these low rates.
While everyone would have liked to see more loan growth in the second quarter, I am somewhat optimistic about what we saw with loan growth at Bank of America during the quarter and management sentiment. Loan prepayment rates are expected to slow and line usage should start to increase.
Bank of America will hopefully continue to see lending increase, as long as the economy continues to move in its current direction. I also think long-term rates need to be at or near a floor, which will be a key factor in the NII for the rest of the year.
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