US Financials Outlook - Optimism For The Future

As negative economic data is continued to be released by result of the ongoing COVID-19 pandemic, financials are at the forefront to provide relief and stimulus in a fundamentally deteriorating economy. As US Banks report earnings I am making the case that it is more important to assess their performance, not on a "beat/miss" scale, but instead understand the quality of liquidity provisions that the US financial system has provided to protect both individuals and businesses. If there is one positive to turn to through all of the pessimism regarding markets currently, it is that banks are remaining accommodating and doing their part in cushioning the economy until we can reopen again.

In BofA's earnings report, in which they missed expectations by $.02, they note that the system is well capitalized with liquidity. Their support for small businesses that are at the economic epicenter of this crisis was shown in their ability to provide $2.4B in loans, separate from any special program in Q1. On top of this, BofA's commercial loans increased $67B as grocers and healthcare providers requested more liquidity in order to keep up with high demand for their products and services. Something else important to note within BofA's internal business operations was their ability to increase capital market revenues. S&T revenues were up 22% YoY (excluding DVA) and investment banking fees were up 10% YoY. These increases shed light on the firm's ability to be dynamic and innovative in their efforts to help their clients through this uncertain time while fully utilizing both the debt capital market and equity capital market to generate revenues.

This same trend can be seen in several other banks that are generating revenues through harnessing volatility in the capital markets. Examples include JPMorgan Chase and Goldman Sachs. These firms are also responding to the call for liquidity and delivering, as seen in Goldman Sachs' $500M in capital to support small business lending while also adding on $50 million in grants specifically aimed towards COVID-19 relief efforts. JPMorgan has extended lines of credit to businesses of all sizes. Through its SBA Paycheck Protection Program, it has provided $36B of loans, with $8B funding businesses with over 600,000 employees. On top of huge monetary and equipment donations being made by BofA and Goldman Sachs respectively, it is clear the the US financial system is doing everything they can in order to aid in the relief effort.

Reflecting on a time such as the 2008 financial crisis provides context into how much the financial system has grown and evolved over the past decade. By strengthening capital, building strong lines of liquidity, and improving credit quality, I believe that the COVID-19 pandemic has been a moment for US banks to showcase the leaps and bounds they have made since the financial crisis, while also providing investors a sense of optimism moving forward.

By: Matthew Cerminaro