When the largest U.S. credit institutions, including JPMorgan Chase (NYSE :), Citigroup (NYSE :), Bank of America (NYSE :), Goldman Sachs (NYSE 🙂 and Wells Fargo (NYSE :), earn the first quarter of 2020 reporting next week, investors are likely to see a seriously ugly picture. It is likely that global financial institutions have hit their companies tremendously as a result of the coronavirus outbreak.
There is hardly a segment of the banking business that has not suffered after the worldwide blockade that has been put in place to prevent the spread of the disease. In addition, interest rates fell to almost zero in the first quarter as the Fed released an unprecedented monetary stimulus to spur growth. At the same time, consumers have drastically cut spending – the main driver of US economic growth over the past decade.
In the future, lenders are expected to face a deluge of delinquencies from companies in industries essentially shut down by the virus – hospitality, tourism, restaurants to name a few – who are now fighting for their survival. This bleak situation, with a recession just around the corner, means that US large-cap bank stocks were worse than the broader market.
KBW NASDAQ Bank Index Weekly TTM
It plummeted 42% in the first quarter, the worst start to a record year.
Analysts at Goldman Sachs say earnings per share for largecap banks could decrease 40% from initial estimates in 2020, 16% in 2021 and 10% in 2022. She added that higher net interest income due to the strong loan volumes won & # 39; t is almost not enough to offset credit losses and other headwinds. says that a "new wave of consolidation" among global investment banks could be caused by the corona virus pandemic. It further says that some banks find their lack of scale and short-term pressure "too acute" to survive the crisis, especially in Europe, where yields are lower compared to larger, more profitable global bank rivals.
Analysis in the report shows that even in a "rapid rebound" recession lasting up to six months, earnings could drop 100% this year.
In the worst case of a "deep global recession", lasting for a year or more, earnings may fall by 277% and there may be significant losses for weaker banks. The report states that credit losses can reach between $ 200 billion and $ 300 billion, compared to $ 30 billion to $ 50 billion if a rapid recovery occurs.
Bad Recession Plus Financial Stress
JPMorgan Chase's chief executive officer, Jamie Dimon, said in his annual letter that the coronavirus pandemic will lead to a major economic downturn, similar to what investors saw during the 2008 meltdown that almost caused a collapse of the US financial system.
"At least we assume it will include a bad recession coupled with some sort of financial stress similar to the 2008 global financial crisis," said Dimon. "Our bank cannot be immune to the effects of this type of stress."
Dimon, the only current CEO to lead a major US bank through that financial crisis, said JPMorgan's earnings will "drop significantly" this year, although the bank is unlikely to cut its dividend. Such a move would only result from "extreme caution," he said.
JPMorgan will provide more details on the impact of the current pandemic situation when it releases its first quarterly results on Tuesday, April 14, before the market opens. Analysts expect a profit of $ 2.2 on revenues of $ 29.5 billion.
Another lender we are is Citigroup, which will report Q1 earnings before the market opens on Wednesday, April 15. In addition to the bottom numbers, investors will also look at Citigroup's efficiency ratio, or expenses as a percentage of earnings. This statistic has risen to less than 60% in the past four years, making Citi the only major global bank to offer such a.
can maintain.
We believe that both Citi and Citi are well prepared for a possible deep downturn, thanks to their sustained cost savings over the past decade and the rebalancing of their portfolios.
Bottom Line
After the devastation caused by the pandemic, this is certainly not the best time to move all-in on bank shares. But investing in financial stocks should be a long-term bet, rather than focusing on factors that affect their short-term outlook.
For buy-and-hold investors, we love both Citi and JPM, given their diversified portfolios, dividend strength and robust returns – the first at 4.61% a year, the second at 3.82% – along with the improved quality of their balance.
