Breakingviews: Banks peer at fun-house mirror version of normal

When driving, it’s advisable to keep an eye on the rear-view mirror. That increasingly looks counter-productive, though, when investing in big financial firms like Bank of America. Banking won’t look like it did before the pandemic anytime soon.

The U.S. lender’s second-quarter earnings reported on Tuesday rose nearly one-fifth from the prior year, buoyed by some things Wall Street firms agree are too good to last. Interest income surged 14%, powered by central bank rate hikes, echoing rivals’ results last week. For the quarter, Bank of America, Citigroup and JPMorgan collectively made $10 billion more interest, year-on-year. Rates will fall, but not soon. And checking account deposits – a form of almost-free funding – are still 51% higher at Bank of America than at 2019’s end.

Borrowers’ creditworthiness too must obey the laws of gravity, but hasn’t yet. Citi boss Jane Fraser and JPMorgan chief Jamie Dimon both foresee a coming “normalization.” Bank of America doubled the charges it takes to cover bad debts from a year earlier. All banks say they’re scouring their commercial property loans for cracks. But all is still abnormally calm. JPMorgan expects 2.6% of its credit card loans to default this year, below the 3.5% Dimon pegs as normal.

While these fillips should fade, other things may be changed for good. Trading revenue is down from last year for most – though Bank of America bucked that trend – but it’s still around one-third bigger for the five biggest trading firms than at the end of 2019. That should stick, thanks to market share won from European rivals. Other new norms are less welcome. Most banks are reporting higher expenses: Bank of America boss Brian Moynihan said that technology initiatives cost around $15 billion a year today, versus $10 billion a decade ago. Wages, compliance costs and competitive pressures are all rising.

Capital rules mark an even bigger hazard for investors redrawing their valuation roadmaps. Regulators want big banks to hold more equity, which means earnings that might have been paid out to shareholders get locked up on the balance sheet. Lenders might try to hike prices, Dimon suggests, or jettison less-profitable businesses, to compensate. That uncertainty is weighing on valuations: U.S. banks trade at around 90% of their book value, according to Refinitiv, where for most of the last decade they traded above 100%. The road ahead is better paved, less certain and slower going.