Banks profited thanks to reserves, but their win is really about the economy

Friday, July 16, 2021 by Robinhood Snacks | Disclosures
_Mood: Loan loss reserves, unleashed [Westend61 via GettyImages]_

Mood: Loan loss reserves, unleashed Westend61 via GettyImages

Take it to the bank... Big Banks came through with expectation-beating earnings and booming profits. While the economy roared back to life last quarter, banks were busy making loans, collecting interest, and closing deals. That flurry of activity translated into big profits:

  • Goldman Sachs made a profit of $5.5B, compared to $373M in the same quarter last year.
  • JPMorgan Chase saw its profits more than double from last year to $12B.
  • Citi's quarterly profit more than 5X'd to $6.2B.

Bankers dropping bangers... Your quarterly reminder that Goldman's CEO is an EDM DJ. Last year, banks added billions in rainy day funds to their reserves. 17M Americans were newly unemployed, so banks set aside $$$ to prep for loan losses. Think: defaults on mortgages, credit cards, and biz loans. But economic healing happened faster than expected, so banks released those loan loss emergency funds.

  • That translated into profit. Chase got a $2.3B boost to its bottom line by releasing $3B in reserves. Citi got a $1.1B boost from reserves.
  • Record i-banking activity helped, too. Most of Goldman's growth was driven by its investment banking biz, which had its best second quarter ever.

A growing economy is a silver bullet for banks... and other cyclical stocks – aka: shares of companies that are closely tied to the health of the economy. Last year, banks were diving into fallout shelters, prepping for worst-case scenario bankruptcies and defaults. This year, banks are undoing that emergency prep. A key reason: the US economy is expected to grow at the fastest pace since the '80s this year. More money in American pockets means more $$$ in the coffers of US banks.