In Q3 earnings, Wall Street banks see glimmer of hope for lending

Americans are slowly heading back to the bank.

Over the course of the pandemic, banks suffered from a dearth of lending activity. Economic uncertainty, free-flowing capital markets, and trillions of dollars in federal stimulus all led consumers and companies elsewhere for their financing needs—that is, if they went anywhere to take on debt.

“When somebody gets a new job, they’ll often want to get a new car. If they feel secure in their environment, they’ll do that kitchen remodel,” Stephen Biggar, director of financial services research at Argus Research, tells Fortune. “The opposite’s the case when you’re fearful about the economy. You pull back on that stuff, and that was the case last year.”

Now, with the U.S. gaining its economic footing and interest rates expected to eventually be on the rise, bankers are beginning to see signs of momentum in their lending results—however small they may be.

“The other half of the smile is coming up,” Bank of America CEO Brian Moynihan told analysts Thursday.

Bank of America saw some of the strongest levels of lending activity among the banks that have reported earnings for the three months ended Sept. 30 so far. Average loan and leases on the Charlotte-based lender’s balance sheet reached $921 billion in the period, down year over year, but still up from $908 billion at the end of June. But the increases weren’t coming from the Main Street branches that Bank of America operates across the country, as loans and leases within its consumer banking business ticked downward to $281 billion in the third quarter from $282 billion in the period before and $319 billion a year ago. Instead, it was the bank’s global wealth and investment management and global markets units that accounted for the majority of its sequential loan and leases gains.

Others’ results were more muted, but still a movement in the right direction, analysts say. Citigroup’s loans fell 1% to $665 billion at the end of the period from the second quarter. And JPMorgan Chase, the nation’s largest lender, reported Wednesday that its loan portfolio was essentially flat between the second and third quarter, though it did inch higher from the third quarter of last year.

Even Morgan Stanley, whose roots are staunchly placed in its trading and investment banking businesses, saw its loans climb 4% over the course of the third quarter and up 22% in the year leading up to Sept. 30.

“Loan growth is coming back,” Biggar says. “It’s a good environment for financials.”

Consumer banking lags behind

It is clearly early days for Wall Street’s banks in their efforts to build up their loan portfolios once again. And with a flurry of questions around supply chain and labor shortage issues, the stability of an improving U.S. economy could still be derailed with the pandemic raging on. But, for now, the slowdown seems to be mostly focused in banks’ consumer businesses.

Wells Fargo, for instance, suffered from a 14% drop-off in average total loans within its consumer banking and lending business in the third quarter versus the same period of 2020, and a decline of 2% compared to the previous quarter. JPMorgan similarly saw loans in its consumer and community banking division slide 2% year over year.

For Ken Leon, equity research director at CFRA Research, the difficulties that banks have had in their consumer businesses has come from what could be a duo of long-term shifts in how people think about credit. The first is that card holders keep paying off their balances, robbing banks of a chance to collect higher service charges on balances, he says, adding that the change may have been born out of the pandemic as consumers are “more conservative about how much personal debt they have.”

And then there is the pack of financial technology companies offering installment loans in the form of buy now, pay later.

“This is getting the attention of analysts on Wall Street,” Leon tells Fortune.

BNPL, as it is known, has taken hold in 2021. One of the biggest players in the space, Affirm, has seen its stock spike more than 25% since its January IPO—especially on the back of announcing partnerships with the likes of Target and Amazon. Jack Dorsey’s Square has even agreed to doll out $29 billion to acquire an Australian-based BNPL competitor called Afterpay.

Carving up large purchases into smaller payments for consumers is not new. But BNPL companies have tried to separate themselves from prior iterations by shifting their source of revenue toward the retailer instead of collecting interest from the consumer. The BNPL model, as a result, has become a mounting source of competition for big banks’ consumer businesses, something many executives readily acknowledge needs to be addressed.

“We’re in a moment of taking all types of potential disruptions, especially fintechy-type disruptions, quite seriously,” JPMorgan CFO Jeremy Barnum said in response to a question about BNPL on the bank’s latest earnings call. Chairman and CEO Jamie Dimon responded soon after to say: “We will spend whatever we have to spend to compete.”