The economic outlook is upbeat for the big banks this earnings season, which is good news for consumers. Bank of America posted positive earnings on Monday. Its allowance for loan losses was flat between the first and second quarters, indicating that the American consumer remains strong. High employment and an increasing capacity to borrow also help. However, the ECB has ruled out a recession anytime soon.
Positive loan growth in Q2
A survey by the Federal Reserve reveals that most big U.S. banks reported strong second-quarter loan growth, despite the fact that the revenue outlook for 2021 is less than rosy. The survey surveyed senior loan officers at major banks, and showed that demand for many more types of loans rose. JPMorgan Chase Bank NA, for example, posted loan growth of 2% or more in Q2, with gains in nonresidential construction, farm, and consumer lending.
Overall, banks reported a slight increase in demand for loans from households and firms in the third quarter of 2021. Compared to the second quarter, the third-quarter increase was less than one percent, and is in line with modest loan growth in July and August. SMEs and large firms reported largely unchanged loan demand in the quarter, while banks noted slightly higher net loan growth in the third quarter. This suggests that banks expect to continue to see positive loan demand in the fourth quarter of 2021.
Upward revisions for S&P 500 companies
In the second half of the earnings season, we can expect downward revisions to S&P 500 companies. If this happens, another leg down for the market could be in store. Already, Walmart, Target, Restoration Hardware, Micron Technology, and others have reduced their Q2 earnings guidance, acknowledging pockets of weakening demand for higher priced discretionary goods and bloated inventories. The market has already been hit hard by downward revisions.
Even though U.S. companies are reporting the worst quarterly profit decline in nearly 12 years, investors are not giving the reports much attention. Even as income falls by 35%, stocks just finished their best July since 2010.
ECB says no recession in foreseeable future
The European Central Bank (ECB) has been reluctant to raise interest rates in the past due to concerns that rising energy prices could lead to an outsized impact on the economy. By raising rates, the ECB is providing itself with the ability to make data-dependent decisions in future meetings. In forbrukslån , it is limiting its role by not causing a recession by raising rates further. This is a bad sign for the economy, and should not be considered a reason to lower interest rates.
While the ECB’s policy interest rate is currently at zero percent, it could return to zero by the end of September. Mario Draghi said in a speech in which he reiterated that “no recession is a likely outcome,” that the ECB is wary of pushing borrowing costs too high. However, the ECB did raise the policy interest rate in May, despite a sharp spike in energy and food prices. According to the ECB, rates will be higher in 2019, and then slow down again in 2023 and 2024.
Upward revisions for Canadian banks
Analysts are expecting average core earnings per share to double this earnings season, which would be a significant change from last year. The top six Canadian lenders set aside nearly C$11 billion for bad loans a year ago, compared with $9.1 billion a year ago. However, this quarter, earnings per share were 9.5% lower, mostly due to fewer days. Although some analysts have argued that the banks may claw back some of their bad loan reserves, this does not seem likely.
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