Record trading revenue helped make 2020 a far better year for the biggest U.S. banks than for most other industries, with the coronavirus pandemic ripping through the country's economy.
While optimism seems to have taken hold across much of Wall Street, the question now is what 2021 will look like, with Goldman Sachs Group Inc. and Morgan Stanley executives saying it's unlikely that last year's trading surge will be repeated.
The five biggest investment banks all reported higher equities-trading revenue than analysts had expected, with Goldman Sachs, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley all beating estimates by double digits.
The increase in revenue coincided with an explosion in stock-market trading in 2020, a phenomenon attributed to the rise of Robinhood Markets, pandemic-driven boredom among Americans looking for something to do while stuck at home, and a seemingly euphoric belief that stocks only go up.
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Still, Goldman executives warned on a call with analysts Tuesday that 2021 may not provide the same trading opportunities that led to last year's bonanza, and Morgan Stanley's chief financial officer, Jon Pruzan, said in an interview Wednesday that it's "unlikely we will repeat 2020."
Five of the biggest U.S. lenders -- JPMorgan, Citigroup, Bank of America, Morgan Stanley and Wells Fargo & Co. -- cut their combined reserves for credit losses by about $6 billion from September, sending fourth-quarter earnings beyond analysts' estimates.
The reduction in JPMorgan's reserves was concentrated in the firm's wholesale unit, which caters to corporations, while at Bank of America, the release came mostly from its consumer business. Finance executives pointed to economic optimism and healthy household and business balance sheets as driving their decisions to reduce provisions for credit losses.
The six banks, including Goldman, had set aside more than $35 billion to cover potential loan losses in the first half of 2020, when few knew how the pandemic would affect the economy and debtors' ability to make their payments.
"It does feel like, at this point, in this crisis, that the bridge has been strong enough," said Jennifer Piepszak, JPMorgan chief financial officer. "The question that still remains is, 'Is the bridge long enough?'"
Loan delinquencies across the banking industry have remained relatively low -- far below the worst-case fears of last spring -- and household spending has picked up in recent months.
At JPMorgan, spending on debit and credit cards was up 26% last quarter from six months earlier, and increased slightly from the same period in 2019. Bank of America CEO Brian Moynihan said total payments by the lender's consumers and small-business clients were up 6.7% during the first few weeks of January compared with the same period last year.
Many banks said consumers reached for their debit cards before their credit cards, a sign that households have cash but are reluctant to take on additional debt.
Executives at JPMorgan, Citigroup, Bank of America and Comerica Inc. said they expect loan growth to pick up this year, but not until after June. PNC Financial Services Group Inc. and Zions Bancorp, which are among the 50 largest U.S. lenders, told analysts they expect loans on their balance sheets to grow by a low-single-digit percentage.
Last year, banks in the U.S. collectively increased their loans and leases by 3%, while deposits -- which provide the funds for loans -- grew by 21%, Federal Reserve figures show.
Five of the six largest U.S. banks got bigger and seemingly stronger during the worst pandemic in a century.
Excluding Wells Fargo, which the Fed has prohibited from growing, the five banks collectively had $10.7 trillion in assets at the end of 2020, up 20% from a year earlier. To put that figure in perspective, the growth in their combined balance sheets almost equals the size of Wells Fargo. The growth at JPMorgan alone -- $699 billion -- is an amount big enough to qualify it as the nation's seventh-largest bank.
The five banks reported $79 billion in total net income for the year, down from the $100 billion they reported in 2019, but an extraordinary figure considering it accrued during a pandemic, a surge in unemployment and government-forced shutdowns of commerce across much of the country.
Lawmakers have taken note. Sen. Sherrod Brown, D-Ohio, who is expected take over as chairman of the Senate Banking Committee, said earlier this month that the nation's biggest banks "have a lot of power, and we need to know more about how they do their business.