Banks Need a Pickup in Loans to Prosper

Things may improve for banks, but without loan demand, revenue growth will still be hard to come by

By Telis Demos

Bank of America executives suggested that the bank’s net interest income likely bottomed in the third quarter. / PHOTO: BESS ADLER FOR THE WALL STREET JOURNAL


Heading into 2021, it appears that things aren’t getting any worse for bank stocks. 

But it may be some time before they get much better.

Bank of America BAC -0.32% executives on Tuesday suggested that the bank’s net interest income likely bottomed in the third quarter, rising about 1% sequentially in the fourth quarter, and that the fourth quarter of 2021 will likely look much better than the first. 

JPMorgan Chase JPM -0.19% last week reported 2% quarter-over-quarter growth in net interest income, and expects a pickup in 2021 versus 2020. The two banks had reported 2020 declines of 11% and 5% in net interest income, respectively.

One reason for optimism, widely cited across banks, is how much cash banks can still shift into their securities portfolios. Even absent any pickup in loan demand, banks can continue to put cash generated by deposits into fixed-income securities that pick up more yield.

Still, the road to much improved interest income across banks isn’t straightforward. One challenge is that mortgages continue to be prepaid because of a surge in refinancing, which affects mortgage-backed securities. 

Bank of America cited this as having a significant impact on its net interest yield. Banks have so much cash to deploy that they can still make gains in yields net of this effect. But where mortgage rates go could be a huge swing factor.


There is certainly hope in the shape of the yield curve. 

Banks across the board noted the recent steepening of the curve, as long-term rates have risen, as a big benefit. 

For example, the spread between two-year and 10-year Treasuries is as wide as it has been since 2017. 

However, banks have reasons to be cautious about simply buying longer-term fixed-income securities, as this could cause them to miss out on future rate increases.

So even a steeper curve isn’t as much help as it could be unless banks add more loans, which can have floating rates or generate higher yields at shorter durations. And loan growth remains a wait-and-see prospect. 

Bank of America noted that commercial loans volume stabilized and halted their decline at the end of the fourth quarter, “providing hope that increased loan demand will soon follow.” 

Bigger stimulus may or may not help matters, particularly for consumers, who have used a lot of their payouts to pay down debts.

Meanwhile, banks may possibly have passed the peak in their Wall Street businesses. 

So far, big banks’ trading desks have reported less revenue in the fourth quarter than in the third quarter. 

This matches the typical seasonal trend, but bankers also were signaling that overall gains may be hard to come by in 2021. JPMorgan Chief Executive Jamie Dimon described the fight for growth in trading share, via scale and digitization, as “trench warfare.” 

Citigroup C -0.86% Chief Financial Officer Mark Mason said trading activity was still robust in January, but it will likely normalize going forward.

S&P 500 bank shares are now down just 10% from where they started 2020, but their multiples have actually expanded, from under 12 times forward earnings to nearly 14 times. 

That isn’t unreasonable, given the pent-up capital return that is forthcoming, albeit at an uncertain pace. 

But without some improvement in underlying loan conditions, banks are no longer much of a bargain.

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