Banks Beat Earnings and Express Optimism for 2021

Banking titans Citigroup, JPMorgan, and Wells Fargo all reported earnings yesterday and, like Jack Sparrow escaping from the East India Trading company, it went surprisingly well.

• JPMorgan and Citi solidly beat analyst expectations, and Wells Fargo grew quarterly profits by 5%.

Zoom out: 2020 was a weird year for banks. The home-buying boom led to a rush of mortgage originations, which are cash cows for the banks that back them. And a crop of mega-successful IPOs like DoorDash and Airbnb helped boost underwriting revenue.

• But banks also set aside record amounts for rainy day funds over the course of the year in case a deluge of loan defaults rolled in from coronavirus-battered businesses.

The deluge never came

Thanks to economic stimulus from Congress and lots of help from the Federal Reserve, defaults were kept relatively in check. Now, given the arrival of vaccines and Biden’s plans for more aid, banks are starting to stow their umbrellas.

• JPMorgan and Citi both shaved down their piles of reserve cash, freeing up $2.9 billion and $1.5 billion, respectively.

Still, the general attitude on Wall Street is walk-before-run. “Our credit reserves of over $30 billion continue to reflect significant near-term economic uncertainty,” JPMorgan CEO Jamie Dimon said in a statement.

Wells Fargo and Citi, meanwhile, are still trying to clean up some unforced errors. Wells Fargo paid out another $321 million in customer refunds in Q4 as it tries to put the fake accounts scandal that broke over four years ago in the rearview mirror. Citi is also retooling its internal risk controls after accidentally sending a group of lenders almost $900 million in August 2020.

Bottom line: Banks are feeling especially motivated to get back on track in 2021; the Fed has given the greenlight for the industry to restart stock buybacks in the first quarter.