Why the global supply-chain crisis is also terrible for Wall Street lenders

• Loan demand remained soft in the second quarter as consumers and companies take on less debt.
• Global shipping delays and supply-chain disruptions are playing a role in lower commercial lending.
• “I learned a lot more about ports than I ever thought I’d learn from customers,” Bank of America’s Brian Moynihan said Wednesday.

A frothy M&A environment helped to boost profits at the big banks in the second quarter, as did large releases of loan loss provisions firms had stored away in the depths of the COVID-19 pandemic last year.

But as revenues in fixed-income trading fell short of those seen during last year’s volatile markets, most eyes were on both consumer- and commercial-loan demand as a barometer of economic recovery when banks reported earnings on Tuesday and Wednesday.

Both individuals and corporations have remained flush with enough cash for months to pay down debt — a healthy habit for them but hardly profitable for the banks, whose business model is partly built on not only amassing deposits but also lending money.

The loan-demand picture became even more complicated when companies began experiencing supply-chain issues this spring. Insider has extensively reported on the problems endemic to global shipping, the broader cause of so many of the supply-chain disruptions Americans have seen throughout the pandemic.

Supply-chain bottlenecks have crimped companies’ demand for loans, as they are less likely to take on more debt if what they’re looking to purchase is not available.

The result is that commercial loan demand will likely take more time to pick up relative to consumers.

“I learned a lot more about ports than I ever thought I’d learn from customers,” Bank of America Chairman and CEO Brian Moynihan said Wednesday on a conference call with industry analysts. At Bank of America, commercial lending fell 14% in the second quarter of 2021 on the same period last year to $494 billion in average loans outstanding during the quarter.

At Wells Fargo, meanwhile, average commercial loans outstanding fell 12% relative to the second quarter of 2020, to $477 billion; at JPMorgan Chase, such lending fell 12%, to $205 billion.

“We would suggest that the substance of supply-chain disruptions are having a meaningful impact on commercial loan growth. The best example I could give you is when you take a look at your local automobile dealer and you go out to their lot, it’s half empty,” Gerard Cassidy, head of US bank equity strategy and large-cap bank analyst at RBC, told Insider prior to the release of bank earnings this week.

Autos have been one of the most visible signs of the current shortages facing US consumers. It was a sentiment echoed by JPMorgan Chase Chairman and CEO Jamie Dimon when he addressed industry analysts on Tuesday.

“The pandemic is kind of in the rearview mirror. Hopefully, nothing gets worse with it. And [consumers] are raring to go. And you see it in home prices, you see it in auto purchases. I mean, they’d be much higher, but for supply constraints right now,” Dimon said.

Instead, investors will have to likely wait until at least 2022 to see a trend upwards that signals US businesses are again taking on debt to fuel growth.

“There continues to be supply-chain issues, as you look at factories that are having a hard time keeping up with demand,” Wells Fargo’s CFO, Michael Santomassimo, said on a conference call with the media Wednesday.

As businesses “look towards the rest of the year and into 2022, I think they’re hoping and think that some of these constraints will start to moderate as we go. I think that’ll bring with it demands for credit, but we haven’t seen that uptake start yet,” he added.