Financials Q3 2020 Earnings Preview: Bank Loan Losses To Push Earnings

With Q3 2020 earnings season starting this week, results from major U.S. banks may show they endured more pain from the pandemic that has hit their lending businesses and forced them to set aside additional money. for possible credit losses.

Yet that deadly combination of borrowing and mounting credit losses has so far not played out in the way that many analysts had predicted. In fact, the huge government stimulus already in place appears to be helping banks avoid the worst case scenario.

In both the first and second quarters, to prepare for the expected tsunami of impaired loans, some of the major US banks set aside additional cash, but with the uncertainty of the continuing pandemic, the provisions needed for credit losses remain unpredictable. An increase in new COVID-19 cases this month now threatens to further affect trade at a time when the government and Congress are negotiating another stimulus package for consumers and businesses, although that effort appears once again.

“We are in a completely unpredictable environment for which there are no patterns, no cycles to report on,” Citigroup (NYSE 🙂 chief executive Michael Corbat told analysts in a Bloomberg report after its second quarter.

This uncertain situation continues to keep investors on the sidelines when it comes to bank stocks. It is down 30% this year, compared to a 7.6% increase for the rest.

Dividend uncertainty

Wells Fargo (NYSE: NYSE 🙂 is the year among the top banks, with stocks falling 53%. The stock closed on Friday at $ 25.30

The lender is scheduled to report on Wednesday, October 14, before the market opens. The consensus forecast calls for it to show a loss of $ 0.44 per share on sales of $ 17.96 billion.

Along with mounting loan provisions, investors are also grappling with the uncertainty of future dividend payments from this and other lenders.

The Federal Reserve has extended its unprecedented restrictions on dividend payments and share buybacks for the largest US banks for the remainder of the year. The limits are being extended due to the current “economic uncertainty of the coronavirus response” and the need for the banking industry to preserve capital, the Fed said in a statement last month.

Caps announced in June prevented banks from raising dividends above second-quarter levels and buybacks were prohibited. Those restrictions were less than the total elimination of dividends demanded by some Democratic lawmakers.

The bar on your payments has disappointed lenders like JPMorgan Chase & Co. (NYSE :), which is eager to resume buybacks.

JPM, Wall Street’s commercial and investment bank, will report third-quarter earnings on Tuesday, October 13, before the market opens. Analysts are expecting a profit of $ 2.05 per share on sales of $ 27.72 billion.

During, JPM set aside $ 10.47 billion for credit losses, more than anyone predicted. The amount surpassed its record of $ 8.6 billion in bad debt provisions since early 2009.

When reporting, investors will look for clues as to whether JPMorgan is close to the bottom of credit losses as the economy reopens and companies try to recover. JPM shares closed at $ 101.20 on Friday, down 27% on the year.

Despite the pressure on overall earnings, trading and underwriting are two areas of the banking business that are still thriving, helping some big 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 pandemic still raging, bank profits are unlikely to recover quickly from their slide. That said, banks are much better capitalized for the current recession than they were during the 2008 financial crisis.

That strength is encouraging some investors to look favorably on some expiring bank stocks. For them, this weakness will be a buying opportunity.

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