The largest U.S. banks will announce their second-quarter results next week. Investors should expect another big hit to earnings as banks set aside more money to cover expected loan losses. On the other hand, the big banks are also continuing to see a boost to fee income from elevated investment-banking and trading activity, even as the coronavirus crisis continues.
JPMorgan Chase & Co. JPM, +5.46%, Citigroup Inc. C, +6.47% and Wells Fargo & Co. WFC, +5.94% are all scheduled to report their second-quarter results on Tuesday. Goldman Sachs Group Inc. GS, +4.43% is expected to report on July 15, followed by Bank of America Corp. BAC, +5.49% and Morgan Stanley MS, +4.82% on July 16, to round out the “big six” U.S. banks. All earnings announcement will be made before the market open.
Opinions about the group vary greatly. Investors naturally shy away from bank stocks during a recession. Memories of the 2008 financial crisis, caused in great part by the banks and resulting in a government bailout and dilutive capital raises, are fresh enough. But this time around, “capital levels are good and sturdy for the large U.S. banks,” according to Jon Curran, a senior bank analyst, and portfolio manager at Aberdeen Standard Investments.
During an interview, Curran pointed to “a surge in investment-grade bond offerings” as well as fees from increased mortgage lending as two factors that are helping to offset the big banks’ rising credit costs.
The provision is the amount added to loan-loss reserves each quarter; it directly affects earnings. A lender will set aside specific reserves for commercial loans that it expects will not be repaid while estimating how much reserve coverage it will need for other loan types.
At the end of the first quarter, the banks quickly boosted reserves, even though only a few weeks had passed since the World Health Organization had declared COVID-19 a pandemic on March 11. At the end of the second quarter, banks were still early in the nonperforming loan cycle. Not only have some businesses been able to avoid loan defaults by participating in the Payment Protection Program, but the CARES Act, with its extra $600 a week in unemployment benefits (set to expire July 31), has pushed back mortgage loan and credit-card defaults while helping rents continue to flow to landlords. Banks’ loan forbearances and payment deferments have also stretched the credit cycle.
The Federal Reserve’s quick action to lower the federal-funds rate target to a range of zero to 0.25% on March 15, along with the central bank’s aggressive bond purchases, have led to such a decline in interest rates that companies are scrambling to lock in those low rates by issuing bonds. People are refinancing their homes for the same reason. All of this action, along with the remarkable recovery for the U.S. stock market from its late-March lows, boosts banks’ fee revenue.
David Konrad, a senior research analyst at D.A. Davidson, upgraded his rating for J.P. Morgan Chase to a “buy” on July 9, writing in a note to clients that he expected the bank to be “the largest beneficiary” of the increased liquidity brought about by the Federal Reserve. The “unique opportunity to buy the stock at “a cheaper than peer valuation,” is underlined by the strong bond market and “increased risk appetite from investors leading to opportunities in [fixed income trading] and equity derivatives,” he wrote.
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