As earnings season for the third quarter of 2020 kicks off this week, results from top US banks may show that they have been more hurt by the pandemic that has hurt their lenders and forced them to set aside extra money for potential losses on loans.
However, that deadly combination of declining credit and escalating credit losses has so far not played out as many analysts had predicted. Indeed, the massive government stimulus already in circulation appears to be helping banks avoid the worst-case scenario.
In both the first and second quarters, to prepare for the expected tsunami of acidifying loans, some of the top US banks have set aside extra money, but with ongoing pandemic uncertainty, the necessary provisions for credit loss remain unpredictable. A wave of new COVID-19 cases this month now threatens to further harm trade at a time when the government and Congress are negotiating a different stimulus package for consumers and businesses, though that effort is reappearing.
"We are in a completely unpredictable environment for which there are no models, no cycles to refer to," Michael Corbat, Citigroup's Chief Executive Officer (NYSE :), told analysts in a Bloomberg report after the second quarter.
This uncertain situation continues to keep investors on the sidelines when it comes to bank stocks. It's down 30% this year, compared to a 7.6% gain for the broader sector.
Dividend Uncertainty
Wells Fargo (NYSE: NYSE 🙂 is the big bank, down 53%. The stock closed at $ 25.30 on Friday
The lender is expected to report on Wednesday, October 14, before the market opens. The consensus forecast calls for a loss of $ 0.44 per share on a sale of $ 17.96 billion.
In addition to increasing credit provisions, investors also grapple with the uncertainty of future dividend payments by these and other lenders.
The Federal Reserve spent the rest of the year extending its unprecedented restrictions on dividend payments and share buybacks for the largest US banks. The limits are being extended due to ongoing "economic uncertainty from the response to the coronavirus" and the need for the banking industry to preserve capital, the Fed said in a statement last month.
Limits announced in June prevented banks from raising dividends above second-quarter levels and banning buybacks. Those restrictions were less than the total elimination of dividends demanded by some Democratic lawmakers.
The bar for their payouts has set lenders such as JPMorgan Chase & Co. (NYSE :), eager to resume buyback, disappointed.
JPM, Wall Street's major commercial and investment bank, will report third quarter earnings on Tuesday, October 13, before the market opens. Analysts expect $ 2.05 per share on sales of $ 27.72 billion.
Over time, JPM set aside $ 10.47 billion for credit losses, more than anyone predicted. The amount exceeded the record $ 8.6 billion in loan loss provisions as of early 2009.
As it reports, investors will look for clues as to whether JPMorgan is near the low end of credit losses as the economy reopens and companies try to get back on their feet. The JPM stock closed at $ 101.20 on Friday, down 27% for the full year.
Despite the pressures on total revenues, trade and acceptance are two areas of banking that are still thriving, helping some of the major lenders weather the storm. JPMorgan saw a 79% increase in market revenue from a year ago in the second quarter, while investment banking fees increased 91%
.
Bottom Line
Given the depth of the current economic crisis and the still raging pandemic, it is unlikely that bank revenues will recover quickly from their slump. That said, banks are much better capitalized for the current downturn than during the 2008 financial crisis.
That force is encouraging some investors to take a positive look at some of the bankruptcy stocks. For them, this weakness will be a buying opportunity.
