Are banks afraid of Covid-19? See how much they’re saving for loan losses this week

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The second quarter results of the largest US banks will not be pretty.

the novel coronavirus wreaked havoc on the economy and banking operations. Lending money has become a much riskier proposition, forcing banks to set aside billions of additional dollars in case consumers and businesses stop paying. And at the start of this year, the Federal Reserve lower interest rates, which aimed to support the economy but also reduce the margin banks can do on all the loans they give.

“When you look at our profits, the last quarter was obviously pretty weak. You will see the same thing this quarter ”, Charles Scharf, Managing Director of

Wells fargo

WFC -0.09%

& Co., said in late May.

It is the only major bank expected to post a loss in the last quarter, according to analysts polled by FactSet.

Others are expected to remain profitable but register sharp declines.

JPMorgan Chase

JPM -0.07%

& Co. and

Citigroup Inc.,

VS -0.06%

who will both report on Tuesday alongside Wells Fargo, are expected to show at least 60% revenue decline from a year ago.

The concern manifested itself in bank stocks, which have lagged behind a market rebound in the past three months. The KBW Nasdaq Bank Index is down 35% this year, while the S&P 500 is only down 1.4%.

Provisions

The biggest impact on profits will be loan loss provisions, the money banks have set aside for potentially degrading loans.

Analysts were caught off guard in April when banks said they were setting aside additional billions of dollars for potential losses, hammering their first quarter results.

The unprecedented nature of the pandemic and the banks’ continued efforts to help consumers make analysts unsure of what to expect in the second quarter. Many lenders let customers temporarily skip payments, hoping that this will give time for the economy to recover and for borrowers to get back on track. But many analysts expect crime to skyrocket later this year as the pandemic continues.

Analysts expect JPMorgan Chase to report quarterly earnings down about 60% from last year.


Photo:

Andrew Seng for the Wall Street Journal

“We think the cadence is full of guesswork,” Jefferies analyst Ken Usdin wrote. Still, he ventured the numbers would be “eye-catching.”

Several banking executives said they expected to set aside more money for bad debts in the second quarter than in the first. “I would tell you that we currently expect to see a higher level of reserves in the second quarter,” Citigroup CFO Mark Mason said in June.

Leaders cautioned that the changing tides of the pandemic and the economic shutdown made it difficult to know. The National the unemployment figure was better that many did not expect and some states began to reopen, giving hope that the worst fears were exaggerated.

The steps

A positive point will be investment banking and commerce.

A volatile stock market, a demand for yield and a rush of big companies to sell debt occupied the banks.

In the first trimester, income from investment banking, fixed-income trading and stock trading has peaked in five years, according to data provider Coalition. Executives said the second quarter was doing even better.

At the end of May, JPMorgan investment banking boss Daniel Pinto said he expected market revenues to increase by around 50% from the quarter last year, a forecast which would imply an increase of $ 2.5 billion.

Margins

The restrictive combination of lower interest rates, higher deposits and slowing loan growth is squeezing bank margins.

Banks make money by charging borrowers more interest than they pay depositors. In the first quarter, the industry’s net interest margin fell to the lowest level since 2016, according to the Federal Deposit Insurance Corp.

Analysts said the second quarter would be worse, in part because the Fed’s recent rate cuts took place in March, only affecting the end of the first quarter.

Customers of all sizes continued parking more money in banks throughout the second quarter. Total deposits in US banks have increased by more than $ 2 trillion this year, according to weekly data from the Fed. This is several multiples of the largest six-month increase on record.

Banks have not been able to lend this money during the pandemic to profit.

Dividends and redemptions

The quarter will miss a major boost: share buybacks.

Seeking to preserve capital, the big banks discontinued share buybacks in March and the Fed then ruled out any buybacks until the third quarter. This means that earnings per share will not be boosted by reducing the number of shares.

In addition, the Fed put certain restrictions on dividends, judging that the payments could not exceed the average earnings of the last four quarters. This forced Wells Fargo say he would reduce his dividend. Other banks have remained stable, but the change will put revenues in the spotlight.

Analysts warn earnings surprises could now lead to larger market reactions given the increased links between earnings and dividends.

Economists have long used letters of the alphabet like V and U to describe economic recoveries. But the coronavirus slowdown is so different from past recessions that economists are offering new forms to describe the potential recovery. WSJ explains. Illustration: Jacob Reynolds

Write to David Benoit at [email protected]

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