As earnings from the big banks roll in, analysts and investors will likely have to continue to wait for material loan growth, which will result in more net interest income (NII) and therefore higher profits. It's not a surprise, considering what bank CEOs have been saying at industry conferences throughout the second quarter.
Banks are seeing a rebound in spending, but it hasn't yet translated into strong loan growth. Consumers are flush with cash from savings and stimulus, and businesses are still not ready to pull the trigger on new inventory spend and other investments.
Despite the delay, Bank of America (NYSE:BAC) is seeing promising signs that loan growth will pick up in the second half of the year, and management seems optimistic, as well.
What happened with loan growth in Q2
In the second quarter, Bank of America saw period-end loans grow 2% from the first quarter of 2021 to roughly $916 billion. But average loans and leases, which are more of a driver of NII, were flat from the first quarter of the year. NII was also flat from the first quarter of the year.
There were a few bright spots mixed into the lack of growth. For one, both average loan and period-end loan balances stayed flat or grew, even as Paycheck Protection Program (PPP) loans were forgiven and those balances declined in the quarter. Additionally, the bank saw commercial, credit card, and residential mortgage loans start to creep up in the second quarter.
Loans in Bank of America's global-markets division jumped 14% from the first quarter, while loans in the bank's global wealth and investment management division climbed 4% from the first quarter. But the bad news is that usage of commercial lines of credit remains very low, and consumers continue to prepay their loans at high rates. Long-term interest rates -- like those on the 10-year Treasury bill, which many loan yields are linked to -- also fell in the second quarter, cutting into NII.
The good news is that Bank of America CEO Brian Moynihan said that even though it's not substantial, nearly all of the bank's various businesses have seen some loan growth. Moynihan also said he doesn't think line usage on the commercial side can really go any lower, as it's still running in the low 30% range, which is as much as 10% lower than line usage normally runs in some segments. In business banking, which serves companies that make between $5 million and $50 million in annual revenue, Moynihan said loans are finally growing on a net basis after being stuck for several quarters.
Another piece of good news is that Bank of America's management team also successfully predicted that NII would reach a trough in the third quarter of 2020. And while the bank is still waiting for more material growth, it has managed to hold NII despite lots of volatility and lower long-term rates.
Lastly, despite the difficulty from long-term rates, management hasn't abandoned its NII outlook for the full year. In the first quarter, Moynihan said that some modest loan growth and the continued improvement of long-term rates and a steepening yield curve, in which long-term interest rates increase while short-term interest rates stay low, could result in NII growing $1 billion from the $10.3 billion the bank generated in the first and now second quarters.
Bank of America's CFO, Paul Donofrio, said that while the goal is now harder to achieve, it's still a possibility if loans continue to grow and long-term rates don't move lower from here. Donofrio added that the bank may decide to put some additional excess liquidity into securities to help that mission.
In contrast, JPMorgan Chase has already cut its NII guidance for the year from $55 billion to $52.5 billion, although the bank has made it clear that it's stockpiling cash and not reinvesting in securities at these low rates.
While everyone would have loved to see more loan growth in the second quarter, I'm somewhat optimistic by what we saw with loan growth at Bank of America during the quarter and sentiment from management. Prepayment rates on loans should slow and line usage should start to move upward.
Bank of America will hopefully continue to see loans march higher, as long as the economy keeps moving in its current direction. I also think long-term rates have to be at or close to a bottom, which will be a key driver of NII for the rest of the year.