A pounder of a quarter: American banks report

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Hello and welcome to the Intelligence from the Economist. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. In Jamaica, it's hard to stay on the right side of the law when it comes to marijuana. Bob Marley's family is selling it in a joint venture. Elsewhere, police are burning down acres of the stuff. Therapeutic, sacramental, recreational. It's all a bit hazy. And our correspondent is at the Cannes Film Festival. Back this year after a pandemic hiatus, the festival vibe is there mostly, but the legendary cues are gone. We get an inside track on the films to look out for. First up, though, That change in the air. This week it was the passing of earnings season for American banks as quarterly report after quarterly report emerged. Everywhere you looked, it was blossoms of optimism from the bosses.

At Morgan Stanley, the firm delivered another strong quarter and a record first half with year to date revenues in excess of $30 billion.

At Goldman Sachs, I think our investment.

Banking business is positioned incredibly.

And at Citigroup, there's a general sense of optimism. We have a fabulous pipeline. One never wants to jinx these things, but we really have a fabulous pipeline.

Part of the seasonal cheer is down to how customers themselves are doing, a fact not lost on JP Morgan Chase, the consumer.

Their house values are up, their stock.

Value'S up, their incomes are up, their savings are up. The pandemic is kind of in the rearview mirror.

Hopefully nothing gets like everyone else, bankers want the pandemic to stay there in the rearview mirror. In truth, though, some of those results only seem so bountiful because of reactions to the pandemic and stimulus checks and rainy day cash piles won't affect the seasonal harvest forever. For now, though, bank bosses are happy just to take in the current crop of numbers.

Banks reported really excellent profits in the most recent quarter this week.

Alice Fullwood is the Economist's Wall street correspondent.

So total bank profits at bank of America, Citigroup, Goldman, JPMorgan Chase, Morgan Stanley and Wells Fargo, which are America's six biggest banks, totted up to a meaty $43 billion in the second quarter of the year. That was about four times their level from the same period in 2020 and around a third higher than they would have posted in an average quarter in 2018 or 2019. So in general, it was a really excellent quarter for bank profits and bank bosses were very happy about it.

And so where are all the profits coming from?

Most large American banks can essentially be split into two functions. So you have the investment banks, these are the banks that deal with markets, so they issue equity and debt for companies, they trade shares in stocks and bonds, and in general, they saw pretty booming market activity last quarter. In particular, business was very, very strong in terms of merger and acquisition activity, which those investment banks earned fees from, and also initial public offerings. So new companies debuting on the stock market, those sources of revenues and profits, did really, really well last quarter at Goldman Sachs, JP Morgan, Morgan Stanley. The other slice of American banks is the retail bank. And retail banks did take a big initial hit during the pandemic, as bank bosses expected that they would have to incur a lot of loan. But what's happened over time, as first the stimulus checks and stimulus payments helped keep customers afloat, and now as the economy is reopening and people are getting jobs again, they've actually over time decided that they probably won't need those loan losses and have gradually been able to revise back up the value of the loans that they had already made. And when they do that, that creates this windfall for profits. So retail banks also posted very strong profits this quarter, although on the revenue side things were a more mixed. There hasn't necessarily been that much loan growth, in part for those same reasons that customers are so flush with cash.

And so you say the mood then among bank bosses is pretty jubilant?

Yes, and that felt quite new. Earlier in the pandemic, bank bosses were quite guarded in the way that they described their earnings. Profits have been strong for a while now, but bank CEOs say things like, oh, we expect our investment bank revenues to normalise. There's no way this frenetic trading and deal making activity continue. And you'd hear retail bank bosses talk very cautiously about the health of the American consumer. They'd be very nervous about how strong their finances were. This quarter really did feel like a complete change in tone. You had the boss of Citi, Jane Fraser, David Solomon at Goldman Sachs, both saying that they had these really strong pipelines going into the next quarter for deal making and IPOs, and that they felt like they were driven by really sustainable factors that would help keep revenues and profits and investment banks very high going forwards. And on the retail side, you had real roar of animal spirits from Jamie Dimon and Brian Moynihan, the boss of bank of America, pointed out that you could really see the health of American consumers in their credit card behaviour. So there's mammoth growth in credit card spending. It's up 40% year on year and even up 22% on the first half of 2019, which was when the world looked normal. But card repayments remain unusually high. So people aren't necessarily accruing those debts, they're paying down those balances, even though they're spending so much.

So it is a bit of a mixed picture, as you say, and in part because of things being not so bad as we expected, and in part because things look to be actually good in the future here. Do you think that future optimism is well founded?

There are definitely some headwinds for banks ahead. So, for example, one of the measures put in place to support the economy was slashing interest rates to zero. And banks tend to make more money when interest rates are higher because they collect interest on loans. And so that is starting to weigh on revenues at the really big retail banks, bank of America, for example, that interest income that they earned fell from close to $11 billion to closer to $10 billion. So that's one potential headwind. American consumers are in such great shape that actually they aren't borrowing that much. They don't have need to run up their credit card balances. So loan growth has been pretty sluggish at the big retail banks, and it's not abundantly clear when that will pick back up again. If you look at that mergers and acquisitions business that investment banks think is going to be so strong, Joe Biden has issued an executive order on competition that did point to mergers and acquisitions activity as potentially being one of the sources of a decline in competition that he wants to combat. So it's possible that some of the firms that were planning to do a lot of merger acquisition type activity, they might be scared off by that. So there are some clouds on the horizon. And finally, one big question mark is about how the American economy will look once all of the stimulus packages begin to end. So the generous unemployment benefits, moratoriums on evictions and foreclosures, these are all due to unwind in coming months, sort of at the end of the summer, and it's Very likely that consumer finances will start to look a little less solid once that happens.

So with all that in mind, the bankers at least are happy. What about everybody else?

In general, analysts on the earning calls, investors that hold bank shares are a little more worried than bank bosses appear to be. One of the reasons is that a big source of profits this quarter was those revisions to loan values. Writing those back up now that they think customers will be healthier, that obviously isn't a source of profits that can endure forever. At some point, there won't be any, any excess write downs that happened in the past that they can adjust for by writing those loan values back up. And that was possibly reflected in how share prices responded to earnings. Even though J.P. morgan and Goldman Sachs, for example, both beat profit estimates quite substantially, their share prices actually fell that day. They were both down by almost 2% by the end of the day, though they have bounced a little since. So investors certainly seem a little more jittery than bank bosses are.

Alice, thank you very much for joining us.

Thank you for having me, Jason.

For plenty more analysis of global business and finance, listen to our sister show Money Talks, available every Wednesday from reputable podcast brokerages. The Caribbean island of Jamaica is famous for lots of things. Its beaches, its food, its music. But there's one association its government is keen to break from Marijuana or weed or ganja or herb has sacramental importance to Rastafarians, among them Jamaica's most famous son, Bob Marley. Herb is a plant.

I mean, herbs are good for everything. Why them say you must not use the herb?

Growing marijuana was illegal in Marley's time and it remains a criminal offense to grow it on a commercial scale and sell it on for recreational use. It's a law that many continue to ignore.

Police in Jamaica have been clamping down hard on farmers who are illegally growing cannabis on the island.

Giorgio Banjo writes about foreign affairs for the Economist.

In the first nine months of 2020, the US State Department estimates that around about 250 hectares of cannabis plants were burnt and about 26 tons of cured marijuana was confiscated. So this happened to a farmer I spoke with. He's had some particular strains of pot that he's been cultivating for years, but the police destroyed it all.

Oh, I lost all my crop.

Like I've created a bunch of strains.

And stuff for myself.

And when they came, initially they said.

They would leave those behind, but they ended up taking them to.

He describes having police turn up at his farm, burning down all of his plants and really removing all of his livelihood, leaving him and the people who work for him essentially with nothing. And this is a really fairly common story that we're hearing increasingly across the island.

So then the laws around marijuana in Jamaica are actually pretty strict and pretty well enforced.

It is super strict in many ways. The illicit side of the industry is still very heavily policed and very cracked down upon. But paradoxically, some forms of cultivation are now legal. So around six years ago, in 2015, they decriminalized growing marijuana for medical use and for therapeutic use. People can legally grow up to five plants at home. They can possess small amounts without being penalized. But if you cultivate it for recreational use, as many small scale farmers do, then, yes, you're at high risk of being caught by the police and of losing all your livelihood, really.

So how is it that the Jamaican people navigate this sort of fuzzy line between what's recreational and what's commercial?

So it's really difficult to navigate because on the one hand, a lot of farmers on the illegal side of the business, they just really want to go legitimate. They don't want to have their farms raided, they don't want to have that insecur that comes with working in the illegal drug industry. But on the other hand, it's really hard to access the legal regulated medical marijuana industry. So the people that often benefit from this, they tend to be wealthier Jamaicans or they tend to be foreign companies. So one example of this is the Marley family. They've got a brand of cannabis which they call Mali Natural. They've partnered up with an American venture capital firm and they're doing really well. They're about to open a her in the Bob Marley Museum in Kingston where they'll sell their own brand of pot. But they're not a typical example of how Jamaicans are benefiting.

Why not, though? Why aren't more Jamaican farmers making use of the exemptions to grow and sell marijuana like the Marley family are doing?

There's a lot of confusion, I think, in Jamaica about what exactly is legal and what is not. So obviously the Marley family have expert lawyers that help to navigate what can be quite a tricky environment in Jamaica when it comes to regulation. But a lot of small scale farmers don't have that same support.

But presumably the commercial end of this, especially the medical marijuana end of this, is potentially a big cash cow.

So many countries are waking up to the opportunities that are now available for medical marijuana. And a lot of people feel that Jamaica's really been missing a trick with this, because Jamaica is obviously known worldwide for cannabis, it's a huge part of its culture, the Rastafarian culture, the music. But so far they haven't really been able to export that, despite legalizing medical marijuana. The problem is really the people who really have the know how about growing cannabis? So we're talking about the traditional farmers, Rastafarians, the marine communities that have this heritage. They haven't really been able to get into the industry and to help, you know, cultivate that image that Jamaica has for growing top quality ganja.

Why is that, though? Why are those farmers being shut out of this as a business?

Starting a medical marijuana business is really expensive. So first of all, you need to pay the license fees to the Cannabis Licensing Authority. Often they can be up to $10,000. Then you've got to meet some very strict demands, protection measures to make sure that people can't steal the cannabis. So you have to have guards around the premises, you have to have security cameras. They're real barriers to entry, really, for these ordinary farmers. That's why, really, it's remained the business of foreign companies, foreign investment, and for wealthier Jamaicans who see an opportunity to get into a growing business.

And why is it the authorities in Jamaica are clamping down so hard on an industry, albeit an illegal one, that's so much a part of the island's culture?

The war on drugs is still going on across the Americas. And one person I spoke to from the government said they were really worried about being seen to be an international hotspot for drugs and for carrying on that reputation of being a weed smoking island, really. So that was a big fear. And I think that's what made them really crack down on a lot of this more illicit side of the business.

But it seems like that question of the licit and the illicit is a bit fuzzy, given especially the case of Bob Marley's and what they're selling now. Are ventures like that going to clarify things in the long run?

Do you think it's no coincidence, really, that Bob Marley's estate is launching a, they call it a dispensary or a herb house in the Bob Marley Museum, because the therapeutic marijuana has always been somewhat angled a bit towards tourists who can afford the more expensive prices and who can smoke a bit more freely than local Jamaicans on the island? So as Jamaicans and as the industry embraces these kinds of things, then I think it's going to be harder to justify cracking down on the illegal industry. And it's going to also prompt questions about how you can be capitalizing off one aspect of the industry while really penalizing often poorer, smaller scale farmers on the other side. So I think if there's the opportunity to really grow the industry, the future really needs to come from these smaller farmers.

Georgia, thank you very much for joining us.

Thank you, Jason.

The Cannes Film Festival is drawing to a close this weekend, having returned to France after a postponement and eventual cancellation last year. Despite France's sharp uptick in Covid cases over the past couple of weeks, the festival went ahead with tight restrictions. That came as a relief to those struggling to get their films seen. Directors, producers and actors such as Andy McDowell.

The whole experience feels much more remarkable, I guess, just to be back with people again. Everybody's a little still hesitant as to whether we should hug or not. I'm looking forward to not worrying about that anymore. It's very exciting to be at the Cannes Film Festival again.

Nicholas Barber writes for the Economist about arts and culture.

It's been going since 1946 and since 1951, it's gone every single year, except for last year. Last year was the first break in all that time. So it's very exciting to be back, even though it's not quite the same.

As it is normally in the sense that it all feels still kind of covidy.

Yes, this year's festival is definitely a bit more Covid y. There are still crowds, the crowds are smaller, there are parties, but not as many. It's also hotter than usual. Cannes always takes place in May. This year it's pushed back to July. But there are a couple of big differences. The main one for people going to press, screenings and so on, is that we have to be tested every two days for coronavirus. The other thing is that Cannes is all about, or has historically all been about, queues. They're trying to avoid that this year, obviously. So we now have to book our tickets online in advance.

So for the ones that you managed to book and be cleared to see, what are the standout films so far?

There's been lots of great films and competition because obviously there's been a bit of a backlog because all the films that were due to be here last year weren't. And then there's films that have been made since then. The festival opened with Annette, which is a avant garde, surreal rock opera with songs by the art pop duo Sparks, and starring Marion Cotillard and Adam Driver. Paul Verhoeven, who did Basic Instinct, Robocop and Showgirls and all sorts of things. The Dutch provocative director is back with Benedetta, which is a romp set in a 17th century convention. As you might expect from Paul Verhoeven, there's plenty of nudity and lesbian sex going on, but there's also quite a lot of satire and commentary on religion and politics in there, too. There's also Wes Anderson's the French Dispatch.

It began as a holiday, and it's.

Three whimsical short stories all set in France.

Arthur Howitzer Jr. Transformed the series of travelogue columns.

All hyper stylized, all incredibly detailed in the design and the humor and the captions and all the rest of it with a big American cast who came here for the red carpet premiere. So there was Bill Murray and Owen Wilson and all sorts of other stars. So they help to add some of the glamour that you want at Cannes.

And so aside from these films, what is the buzz on the ground among critics such as yourself?

Well, it's just a lot of excitement that everyone's happy to be here. There is controversy, as there always is at Cannes. The perennial complaint is there aren't enough films directed by women. I mean, there are a few people feel that in the last couple of years, Cannes hasn't really done enough to get in more films by female directors. On the other hand, the main competition jury, which is headed by Spike Lee, does have more female than male jurors on it. This year, for instance, the actress Maggie Gyllenhaal has been quoted as saying she wants to see more women making films at Cannes.

I think when women are listening to themselves and really expressing themselves, even inside of a very, very male culture, we make movies differently, we tell stories differently.

And what about any films we might not yet have heard about? Might be under the radar a bit that you think we should catch.

One that struck me was a film called Onoda, about The Japanese holdouts, that is, the soldiers who were convinced after World War II had ended that actually it was still going. And one of these men, Lieutenant Hiru Onoda, hid out in a jungle on an island in the Philippines for 30 years. So it's a great big, sprawling war epic, but at the same time, it's a very intimate study of this one man and why he might want to stay in the jungle. And I suppose maybe I find it particularly resonant because, of course, we've all been hidden away in our own little bubbles, away from the world. And the idea of emerging into the world is quite a scary thought at the moment. But I wouldn't be at all surprised if Onadug goes on to give awards and buzz around the world.

Thanks very much for joining us, Nicholas, and enjoy the rest of your stay.

Thanks very much.

That's all for this episode of the Intelligence. The show's editors this week are Kim Gitelson and Chris Impey. Our sound engineer is Daniel Lloyd Evans, with help this week from Saul Rivers. Our senior producers are Hannah Mourinho, Duncan Barber and Sam Colbert. Our producers are Stevie Hertz and William Warren and assistant producer Ebisoye Ocean Dairo, with extra production help this week from Rory Galloway, Kevin Kaners, Dan Ashby, Lucy Taylor and Juliet Jabkiro. We'll all see you back here on.

Sam.