The Economist - USA (2020-10-17)

60 Finance & economics The EconomistOctober 17th 2020

2 frompropertysalestoseaportcargo.The

resultsarestark.Whereasofficialgdpgrew

by48%incumulativetermsfrom 2014 to

2019,theyputthetrueexpansionat33%.

China’sboffinscantoturntoanunlike-

lycornerfora partialdefence:America’s

FederalReserve.JohnFernald,EricHsuand

MarkSpiegel,economistsattheFed’sSan

Francisco arm, have also constructed a

proxy forChinesegrowth, laidoutin a

forthcomingpaper,usingindicatorssuch

asconsumerexpectationsandfixed-asset

investment.They,too,concludethatoffi-

cialgrowthhasbeenimplausiblysmooth

since2013.Buttheyfindthattruegrowth

wasfasterabouthalfthetimeandslower

theotherhalf(seechartonpreviouspage).

The crucial test for these proxies is

whethertheyofferinsightsaboutChina’s

trajectorythataremissingintheofficial

gdpdata.Bothpassthetest.Theupsand

downs of their measures better explain

China’speriodicshiftsinfiscalandmone-

tary policies than theuncannily steady

pathofofficialrealgdpdoes.TheFedecon-

omistssubjecttheirproxytoanothertest,

constructingittobeinlinewithChinese

imports,asmeasuredbythereportedex-

portsoftradingpartners—inotherwords,a

datasource entirely free frompotential

Chinesefiddling.Incountrieswithreliable

statistics,importgrowthtypicallymoves

closelywiththatofgdp. Thatisthecasefor

theirproxy—butnotforofficialgdp.

DoesthismeanthatChinesedataare,

putbluntly,garbage?No.TheFedecono-

mistsfindthatChinesestatistics,withthe

notableexceptionofrealgdp, havebecome

morereliableovertime.Theanalystswith

CapitalEconomicsconcludethatthemain

problemoccursinthetransformationof

nominal figuresinto real ones;statisti-

ciansappeartouseexcessivelylowinfla-

tionrateswhencalculatingrealgrowthso

thatthegovernmentcan hit itstargets.

Nominalmeasurements aremore trust-

worthy,andthatmatterswhentryingtoas-

sess,say,China’sdebtburdenorthesizeof

itseconomyrelativetoAmerica’s.

Theproxies,alas,offerslightlydifferent

narratives about China’s economy this

year.Capitalbelievesthattheslowdownin

thefirstquarterwasmuchsharperthanre-

ported,whereastheFed’scalculationssug-

gest thatit was milder. Both, however,

agreeonthemostsalientpoint: there-

boundsincethenhasbeenbig.Thecrowd-

edstreetsandbuzzingshopsdonotlie. 7

M

ost bankershave been working fran-

tically for the past six months. Trad-

ers handled record-high volumes in chop-

py markets. Their colleagues issued

mountains of equity and debt as compa-

nies sought to withstand the economic

downturn by amassing capital. Commer-

cial bankers offered forbearance to strug-

gling borrowers, and were forced to write

down the value of loans as the likelihood of

being repaid fell. As a result, investment-

banking revenues soared in the first half of

the year, and most commercial banks suf-

fered losses as they set aside provisions for

bad loans. That made for slender profits at

Bank of America, Citigroup and JPMorgan

Chase, the big hybrid banks. Goldman

Sachs and Morgan Stanley, which are more

skewed towards investment banking, post-

ed stellar profits. Wells Fargo, a mostly

commercial lender, lost money.

The third-quarter earnings reported by

five of these banks on October 13th and 14th

tell a different story (the sixth, Morgan

Stanley, was due to report on the 15th, as

The Economistwent to press). Investment

bankers were still busy—trading revenues

were up by around 20% compared with the

third quarter of 2019, and Goldman’s pro-

fits doubled on the year. But the pace of ac-

tivity was leisurely compared with the sec-

ond quarter, when trading revenues were

up by 60% over the same period in 2019.

Banks also think they are now largely

prepared for losses. In the first half of the

year the big five booked $60bn-worth of

provisions for bad loans. But those in the

third quarter were skinnier, at just $6.5bn,

not far off those in the third quarter of 2019

(see chart). The stock of allowances for bad

loans adds up to $106bn, about 2.8% of

banks’ loan books. Non-performing assets

are creeping up, but are still far from the

levels that would wipe out provisions. Jen-

nifer Piepszak, the chief financial officer of

JPMorgan, said that customers were “hold-

ing up well”.

As the perils of higher provisions and

the spoils from market volatility became

less dramatic, investors’ attention turned

towards a more prosaic influence on earn-

ings: banks’ net interest incomes, or the

difference between the interest collected

on loans and other assets and the interest

paid on deposits and other funding. These

have been squeezed by interest-rate cuts by

the Federal Reserve and low long-term

bond yields. America’s five large banks

earned $44bn in net interest income in the

third quarter, 13% less than in the same per-

iod last year. All together, reduced interest

income, calmer trading revenues and sub-

siding credit costs meant that profits were

lower than they were a year ago, but less

starkly so than in the second quarter. Pro-

fits fell by 11% across Bank of America, Citi-

group and JPMorgan in the third quarter,

compared with a drop of 56% in the second.

The question now is what banks will do

with their earnings. Regulators, still

scarred by the global financial crisis of

2007-09, want well-padded shock absorb-

ers. On September 30th the Fed said that

the 33 banks with more than $100bn in as-

sets would remain barred from buying

back shares in the fourth quarter. Dividend

payments are allowed, in contrast to Eu-

rope, but capped. As a result many banks

are accruing capital. JPMorgan’s common-

equity capital ratio rose to 13.0%, from

12.3% in the third quarter last year. At Bank

of America the ratio climbed to 11.9%, from

11.4%. That is about $35bn above regulatory

requirements, Paul Donofrio, its chief fi-

nancial officer, told analysts.

With buy-backs off the table, bosses can

either spend or save the cash. Some are

splashing out. Bank of America said it had

invested in adding branches in the third

quarter, pandemic notwithstanding. Oth-

ers are acquiring new businesses. On Octo-

ber 8th Morgan Stanley announced that it

was buying Eaton Vance, an asset manager,

for $7bn. That came just days after it com-

pleted its purchase of E*Trade, an online

trading platform.

The extra capital could also come in

handy if the economy fares worse than

even the dismal scenarios baked into loan-

loss provisions. Banks’ bosses sounded

cautiously optimistic that this would not

be the case. But investors have their

doubts. Banks’ share prices are still a third

below their levels at the start of the year. 7

NEW YORK

Banks say they are prepared for losses. Now what?

Wall Street

The calm after the storm

Forewarned is forearmed

United States, five biggest banks*, $bn

Source:Banks’

earningsstatements

*JPMorganChase,Citigroup,Bank of

America,WellsFargoandGoldmanSachs

40

30

20

10

0

2019 2020

Q4Q3Q2 Q3Q2Q1

Loan-lossprovisions

Charge-offs