Banks are in fine shape, but the economy isn’t

While the broader stockmarket appears to be focusing on rosy scenarios, banks aren’t.

While the broader stockmarket appears to be focusing on rosy scenarios, banks aren’t. GETTY IMAGES/AFP

Two of the three big banks that reported results on Tuesday still earned a lot of money in the second quarter. That is less reassuring than investors might hope.

Underlying the banks’ relative resilience in the second quarter were some arguably temporary benefits that don’t really address the long-term economic risks.

Reserve builds in anticipation of future credit losses remain a major swing factor for earnings at Citigroup, JPMorgan Chase, which turned profits, and Wells Fargo, which didn’t. But bankers stressed that their provisioning remains highly subjective and they lack much visibility into the true health of consumers, the biggest source of credit risk.

The reports did resolve some near-term questions for investors. Dividends for now appear safe at JPMorgan and Citigroup. Due to a tidal wave of investment-banking and trading fees, these banks are still adding to their core equity capital levels. Wells Fargo is a special case due to asset-growth limitations imposed on it by the Fed, and has already said it would be cutting its dividend.

But the quarter provided little that should give investors marginal comfort on the more complex questions that loom. That includes whether the additional loan-loss reserves set aside in the second quarter represent the peak, and what banks’ earning power will look like in a stagnant economy at zero interest rates.

Bankers emphasised that while they see hopeful signs, massive government stimulus and unemployment benefits have made it difficult to gain a true picture of consumers’ future health.

Meanwhile, there are signs that risks are spreading beyond consumers. Second-quarter reserve builds for wholesale and commercial lending went up far more than they did for consumer loans across the three banks.

While the broader stockmarket appears to be focusing on rosy scenarios, banks aren’t. Investors looking for evidence of a strong and rapid economic rebound will need to look elsewhere.