Why loan growth could help boost the profitability of US banks

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Sep. 10 2014, Updated 1:00 p.m. ET

Solid loan growth should be a key contributor to higher net interest income for banks. One of the key themes that emerged from major U.S. banks’ second-quarter earnings reports is a notable pick-up in both consumer and, particularly, commercial loan volume. As economic growth continues to improve over the next year, loan volume should expand further, providing a tailwind to banks’ earnings.

Market Realist – The graph above shows the loan growth experienced by the banking sector. Lending by the banking sector has been increasing steadily since the financial (XLF) crisis of 2008.

As per the FDIC’s quarterly banking report, the second quarter lending report was extremely positive, with loans and lease balances growing by 2.3% (the highest since the crisis), residential mortgages up by 1.2%, and an increase of 3.1% in commercial and industrial lending.

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The increased asset quality and lending growth boosted the earnings of top banks in the second quarter. Wells Fargo (WFC) recorded a rise in net income by 3.8%. Bank of America (BAC) showed a fall of 43% in profits—but that was primarily due to litigation costs worth $4 billion accruing to the bank in the quarter. The outlook is positive for the third quarter.

JP Morgan Chase (JPM) saw a fall in net income by 7.9% as well. But the bank’s earnings were higher than analyst expectations. Goldman Sachs (GS), too, beat analyst expectations to report a second quarter increase in net income of 5%.

Read on to the next part of this series to learn how increasing capital market activities can help boost earnings.

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