Investors are looking for signs that loan growth is finally starting to stage a comeback at the biggest US banks after staying stubbornly out of reach during the pandemic.

Wall Street executives have begun pointing to early indications that small businesses and individual consumers are taking on debt again after government stimulus cheques depressed demand during the Covid-19 crisis. Analysts at firms including Goldman Sachs and Keefe, Bruyette & Woods are predicting that a turning point will be reached for loan growth when large lenders report their third-quarter results this week.

“Loan growth is almost certainly around the corner, it’s a soft inflection point,” Mike Mayo, an analyst at Wells Fargo, said. “If loan growth were a car, it has gone from reverse to first gear.” 

While government-aid programmes have helped big US lenders sidestep widespread defaults during the pandemic, they have also allowed consumers and companies to avoid taking on new loans or tapping lines of credit. That trend, along with persistently low interest rates, has weighed on the profitability of banks’ core lending businesses in recent quarters. 

Estimates for loan growth at the four biggest US banks vary widely, with analysts expecting total loans to be little changed from a year earlier and up slightly from the second quarter. Total loans are forecast to gain 5.4% from a year earlier at JPMorgan Chase and 5.3% at Citigroup, while dropping 8.5% at Wells Fargo and 3.3% at Bank of America, according to analysts’ estimates compiled by Bloomberg.

Growth from the second quarter is expected at all but Wells Fargo where a 0.3% drop is forecast.

Loan growth remains under pressure as companies find it easy to instead tap capital markets for funding, and labour shortages and supply chain constraints hold back business expansion. The rise of Covid-19’s Delta variant has undercut plans by companies and individuals for a total return to normalcy, and thus appetite for new debt.

“There are signs of loan growth. From the looks of it, it will take several quarters,” said Christopher McGratty, an analyst at KBW. “It’s been a little bit of a moving target this year.”

Among the big banks, JPMorgan is set to report earnings first, on Wednesday, followed by Bank of America, Citigroup, Morgan Stanley and Wells Fargo all on Thursday, and ending with Goldman Sachs on Friday. Revenue is forecast to climb at half the firms, with the six likely to report combined revenue of roughly $112 billion, up 3% from a year earlier. 

Here are other areas investors will be watching as results are reported:

Deal making: The third quarter was a boom time for M&A. Deals, including firms going public by merging with special purpose acquisition companies, surged to the highest level in at least five years, data compiled by Bloomberg show. Almost every bank is expected to double its advisory fees, led by Citigroup and Goldman Sachs, analysts’ estimates show.

“M&A activity has been tremendous,” McGratty said. That will “normalise, but as that happens loan growth will return to help offset some of those normalisations.”

Trading: Trading revenue is poised to drop across the six biggest banks from both the second quarter and a year earlier, analysts’ estimates show. Trading of fixed income, currencies and commodities — typically a bigger generator of revenue for banks than equity trading — will be hurt by comparisons with a year earlier, when the pandemic roiled debt markets.

In equities, banks were helped by the stock market touching a new high in the third quarter and a slew of initial public offerings and SPAC mergers, which also drove up trading activity. Equity-trading revenue probably increased 14% on average across the six largest banks from a year earlier, according to analysts at Deutsche Bank.

“Bull-market banking is still here,” Wells Fargo’s Mayo said.

Loan losses: At the beginning of the pandemic, large US banks set aside tens of billions of dollars to prepare for borrower defaults, but those loan losses were prevented by government programmes, and lenders ended up releasing some of those reserves. Analysts expect the latest round of releases to be smaller than in the previous two quarters.

Lenders including JPMorgan, Bank of America, Citigroup and Wells Fargo are likely to announce an additional $5bn in set-asides being released. “The bulk of reserve releases is now behind us,” Goldman Sachs analysts said in note to investors ahead of third-quarter earnings.

Interest income: With loan growth sluggish, income from interest payments is set to remain depressed. Growth in net interest income, a key metric for banks, is right around the corner, but is likely to have changed little in the third quarter from a year earlier, according to analysts’ forecasts. NII — revenue from customer-loan payments minus what banks pays depositors — has also been hurt by low interest rates.

“NII could be soft due to sequentially lower loans and average rates during the quarter,” Robert W Baird analysts David George and Gus Vanevenhoven said in a research note earlier this month. “A robust recovery in NII and the forward NII look from banks is the most important fundamental factor coming out” of this earnings season. 

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