Heads of biggest banks stress need for more stimulus to power economic recovery and avoid deeper recession

This week’s bank earnings say more than just how the giants of the financial services industry are faring seven months into the coronavirus pandemic. The presentations and comments made in response to investor questions provide a glimpse into what banking executives expect a “new normal” to look like and how the American economy will reshape itself around Covid-19 in the future.

At a recent trade group conference, JPMorgan Chase CEO Jamie Dimon laid out how life is likely to look for many workers: An increased reliance on remote work and as many as 40 percent of Chase’s own workforce working from home on a rotating basis. But Dimon also repeated a viewpoint he had previously expressed about an urgency to resume some semblance of pre-pandemic normalcy in the workplace, with “rational, thoughtful return to the office” a growing priority if the substantial service-sector economy is to recover.

In an investor conference call Wednesday, Bank of America CEO Brian Moynihan and CFO Paul Donofrio noted that while credit card spending improved in the last quarter, it was still below pre-pandemic levels as a result of people not spending on travel and other services.

Heading into earnings season, a big question for analysts was how much banks were setting aside in anticipation of future defaults from credit cardholders, homeowners, business owners and commercial real estate operators. The answer was largely a relief: After setting aside huge amounts of cash in anticipation of a deluge of bad debt, banks reported that they were dialing back on those reserves, either adding significantly less to them or, in some cases, outright trimming them back.

“We’ve certainly hit bottom in terms of loan loss reserves,” said Ken Leon, director of equity research at research firm CFRA.

Bank executives noted that unemployment, loans in deferral, consumer spending and borrowing activity have all recovered off lows earlier in the year. The expected wave of default never materialized, analysts say, because enhanced unemployment insurance payments, the Paycheck Protection Program and other emergency funding streams allowed millions of Americans and small business owners to continue repaying loans.

“Keeping bank earnings afloat is the fiscal stimulus that helped bridge the gap for many people and businesses.”

“The main thing that is keeping bank earnings afloat is the fiscal stimulus that helped bridge the gap for many people and businesses,” said Luke Lloyd, investment strategist at Strategic Wealth Partners.

Where banks still struggled was with their ability to turn a profit lending money. With a near-zero Fed funds rate and a commitment from Federal Reserve Chairman Jerome Powell to hold that rate there for an extended period, banks are limited in their ability to earn income from borrower interest.

“This is anywhere from 50 to 60 percent of total net revenue for these banks,” Leon said.

Banks did report growth in asset and wealth management, and in their trading divisions.

The cautious optimism expressed by big bank executives, though, hinges on some assumptions about the outcome of the election less than three weeks away, and on the ability of lawmakers to deliver additional support to Main Street.

“Right now the polls are indicating a Democratic sweep,” said Marc Chaikin, founder of Chaikin Analytics. Markets are baking in that assumption, he said, as well as the presupposition that a ‘blue wave’ will herald a sea change in fiscal policymaking. “I think the market is basically looking beyond the fourth quarter and assuming there’s going to be a big stimulus bill, plus infrastructure spending,” he said.

If these spending programs are not forthcoming, the dynamic could change rapidly. Chaikin noted that both Chase’s Dimon and Citigroup CEO Michael Corbat expressed a note of caution about the fourth quarter. “They want to see a fiscal stimulus bill passed in Washington,” he said.

Fed Vice Chairman Richard Clarida also touched on the topic in remarks delivered virtually to the Institute of International Finance on Wednesday. “The Covid-19 recession threw the economy into a very deep hole, and it will take some time, perhaps another year, for the level of GDP to fully recover,” he said. “It will take some time to return to the levels of economic activity and employment that prevailed at the business cycle peak in February, and additional support from monetary — and likely fiscal — policy will be needed.”

“I think it is likely that Q4 would look worse without additional stimulus measures,” said Jeff Mills, chief investment officer at Bryn Mawr Trust, who noted that there already is evidence that more Americans are tapping their savings to stay afloat.

“Given still-high levels of unemployment and the likelihood that income levels will continue to be challenged, spending will ultimately come down if additional stimulus is not added,” Mills said.

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