Major U.S. banks appear to be finally opening the lending spigot.
Second-quarter earnings reports due this month are likely to reveal a slight reversal of the long-term shrinkage in bank loan books, one of several positive signs for investors, bank analysts said.
A number of other long-term clouds over the weakened banking sector may be clearing. Credit quality is on the mend, signalling that many large banks will bolster their bottom lines with money that had been reserved to cover losses on bad loans.
And Bank of America Corp.'s startling $8.5-billion (U.S.) settlement with mortgage bond investors last week adds clarity and may spur rival banks to clear up their own legal liabilities from home loans.
Another big question mark – how much banks will be hurt by a new law limiting debit card fees – was answered last week when regulators finalized rules that were not as ferocious as initially proposed.
"We're chipping away at the problems here," said analyst Jason Goldberg of Barclays Capital.
The earnings reports begin on July 14 with JPMorgan Chase & Co.
Banks, of course, are far from being in the clear. Weak fixed-income trading and market volatility are believed to have weighed heavily on the biggest banks in the second quarter, while their net interest revenue continues to be pummelled by low interest rates. And low rates are expected to continue for the indefinite future.
A growing loan book, however, could cover a multitude of woes. The U.S. Federal Reserve Board said last week that loans and leases in bank credit grew about 1 per cent on an annual basis in both April and May, with the biggest growth – over 11 per cent each month on an annual basis – coming from commercial and industrial loans.
Real estate lending is still shrinking, and consumer lending, while stabilizing, is still tepid. Consumer lending grew just 0.1 per cent on an annual basis in the second quarter, primarily from increases in credit cards and other revolving loans.
"Banks are beginning to lend again and that's a good sign," said Timothy Ghriskey, co-founder of Solaris Group, which owns bank stocks. "There are a lot of issues out there that still have a potential impact on future earnings. This is going to take years."
Large banks are starting to loosen their standards for credit card applications, according to a Fed survey of senior bank loan officers in April.
JPMorgan Chase, widely considered the strongest of the top three U.S. banks, is expected to report a second-quarter profit of about $1.22 per share, up from $1.09 a year earlier, according to Thomson Reuters I/B/E/S.
Citigroup Inc. will be next to report, on July 15, and is expected to post a profit of 97 cents a share. A year earlier it earned 90 cents, adjusted for a 1-for-10 reverse stock split in May.
Bank of America's mortgage settlement will likely bring it to a quarterly loss of $8.6-billion to $9.1-billion, or 88 cents to 93 cents a share. It reports on July 19.
Regional banks such as US Bancorp and BB&T Corp. could be the biggest beneficiaries of loan growth since they won't have large trading businesses offsetting increased lending fees. Even Regions Financial Corp., the only one of the 19 largest U.S. banks that has not yet repaid the government bailout it received during the financial crisis, is expected to see its loss shrink to 1 cent a share. It lost $335-million, or 28 cents a share, in the comparable 2010 period.
Investors breathed sighs of relief last week over two costly developments that answered questions long weighing on the banking sector.
B of A complemented the $8.5-billion settlement of mortgage repurchase claims from institutional investors with notice that it would take an additional $11.9-billion of charges for other mortgage settlements, and write down the value of its 2008 purchase of Countrywide Financial, among other items.
The settlement put a ceiling on what other banks, including JPMorgan Chase and Wells Fargo & Co., could be expected to pay to resolve their own legal issues, investors said.
"Everyone can assume that Countrywide was as bad as it got … that's the worst-case scenario," Nuveen Investments analyst Alan Villalon said.
On the same day that B of A announced its settlement, the Fed unveiled final guidelines for its long-debated crackdown on fees that banks can charge merchants who accept debit cards.
The rules on the "swipe" fees, mandated by the 2010 Dodd-Frank financial reform law, are expected to shave $9.4-billion from an estimated $23-billion of annual debit card processing revenue in the banking industry, according to CardHub.com. That's far better than the $14-billion hit that many analysts had forecast.
New capital surcharges from bank regulators, announced last month, also resolved some questions about global regulatory requirements banks will have to meet. On top of a base of 7-per-cent risk-based capital that banks must set aside, the biggest banks will have to add as much as an additional 2.5 per cent, depending on size and risk.
"That's been the largest overhang on these stocks, just the unknowns that are out there," said Jason Ware, equity analyst at Salt Lake City-based Albion Financial Group. "On the debit card fees, the banks got a gift. With the capital guidelines, we're starting to get some numbers we can use."
Large banks are starting to loosen their standards for credit card applications, according to the April Fed survey.
The main thing going for bank stocks today is that they have been beaten down to cheap valuations, according to some analysts. Large banks on average are trading at about 1.25 times tangible book value, according to Nuveen's Mr. Villalon, while Citigroup and Bank of America are closer to a multiple of 0.85. JPMorgan Chase is trading at about 1.33 times tangible book value, he said.
As some note, however, uncertainty about the economy and regulatory developments still loom over bank stocks.
Trust banks such as Bank of New York Mellon, State Street Corp. and Northern Trust Corp., which avoided many of the credit issues weighing on their competitors, are grappling with the same pesky issues that have dogged them for several quarters: low interest rates and few remaining opportunities to trim expenses.
State Street and BNY Mellon also have an overhang of lawsuits accusing them of overcharging pension funds on currency trading.
In coming years, analysts expect trust banks will have to adjust pricing for a number of products they sell, with currency trading likely taking in less money.