Bank Lending Under Pressure As Investment Banking Booms

Bank earnings have unusually high stakes this quarter, with investors’ dividends at stake and banks expected to add billions to their loan-loss reserves due to the pandemic’s economic effects, The Wall Street Journal (WSJ) reported.

Investment banking has seen an uptick as of late, with Citigroup and J.P. Morgan Chase both reporting positive trading revenue returns rising 40 percent year over year, with rising fees on debt and equity underwriting also most likely spiking in the quarter, WSJ reported.

Although actual defaults have been stalled, for both consumers and investment-grade companies borrowing from banks, new accounting rules have forced banks to look further into the future for projections on how they’ll deal with the environment.

It’s currently unknown whether the banks believe the programs will offset potential losses, rather than only delaying them — the banks’ responses to their observations on what they’re seeing beneath the headline trends will be scrutinized. Even if they don’t see a reason to under-reserve, many of them will not be optimistic, particularly with more Federal Reserve stress tests coming soon, WSJ reported.

Some of the banks are operating under the idea that the economic downturn won’t be as prevalent during the second half of the year, and that recovery is possible, with investors not likely to award the increasing revenues with much of a high multiple, given their potential transitory natures, according to WSJ.

Earnings from lending and interest are strained, WSJ reported, with low funding costs due to a record dash to cash from companies and individuals looking at putting money in noninterest-bearing accounts. But the interest collected will not be as high, with banks standing to take millions from Paycheck Protection Program (PPP) loans, but most of that money will be spread over the life of the loans.

Loans have overall been dwindling, with falling consumer-loan balances from cards and a wave of corporate credit-line drawdowns are pressuring banks’ total interest income, WSJ wrote.

The PPP was left with around $130 billion in funding, due in part to businesses not using it.