Bank Earnings: Expect a Messy Quarter and a Peek at 2021
14 Gennaio 2021 - 11:59AM
Dow Jones News
By Orla McCaffrey
2020 was a whiplash kind of year for U.S. banks. When the firms
start reporting fourth-quarter earnings this week, investors will
want to know if they should expect another.
The spring and summer of 2020, when the coronavirus pandemic
first started to ravage the U.S. economy, looked bad for banks.
Profits plunged as they set aside money for bad loans. So did their
stock prices. But by the fall, things had improved. Strong mortgage
demand, healthy trading revenue and an economy kept afloat by
generous government stimulus helped insulate the banks from a
worst-case scenario.
What isn't clear now is how long those boosters can last.
"The fourth quarter is going to be messy," KBW analyst Brian
Klock said. "But the real focus is going to be what 2021 is going
to look like."
JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo &
Co. report results Friday. Bank of America Corp., Goldman Sachs
Group Inc. and Morgan Stanley follow next week.
KBW analysts expect per-share bank earnings to fall 8% in the
fourth quarter compared with the same time in 2019. They also
expect profits to fall compared with the third quarter, when some
of the largest banks delivered better-than-expected results.
Net charge-offs are expected to rise in the fourth quarter from
the third but remain far below historic highs, analysts said.
Concerns over deteriorating credit quality ate into profits in
2020, when banks set aside billions of dollars to cover potential
losses. Banks and analysts have lowered their loan-loss estimates
since the pandemic's early days, but those could rise again if the
current jump in coronavirus cases further slows the economic
recovery.
Banks are expected to announce plans for stock buybacks, one of
the main ways they return capital to shareholders. The Federal
Reserve stopped buybacks at big banks last year, a move to preserve
capital in an unsettled economy, but said in December that banks
could restart them with limitations.
The unusual nature of the coronavirus recession padded bank
revenue in ways that few could have predicted at the pandemic's
outset. Mortgage originations, a key source of fee income, reached
record levels as well-off families looked for homes with more
space. The stock market, boosted by tech companies that profited
from the stay-at-home economy, soared to records, lifting trading
desks. Stimulus checks, loan deferrals and expanded unemployment
helped many consumers and businesses, driving loan defaults lower
-- not higher -- for some companies.
Bank stocks mounted an impressive recovery in the fall after
trailing the broader market for much of 2020. The KBW Nasdaq Bank
Index rose 34% between October and December, compared with a 12%
increase in the S&P 500.
"We're going to look back on 2020 and think 'Oh my God, what in
the world did we have to live through?'" said Marty Mosby, director
of bank and equity strategy at Vining Sparks. "But in reality,
things happened in a way that definitely helped bank
profitability."
Still, mortgage levels are expected to decline in 2021. Rising
coronavirus cases and job losses threaten to keep consumers at home
and squeeze their income, which would likely weigh on credit-card
spending and leave some customers unable to pay their bills.
Low interest rates, which crimp bank profits by limiting what
banks can charge on loans, are also a challenge. The Fed slashed
its benchmark rate to near zero last March. Analysts expect net
interest margin, a key measure of lending profitability, to decline
even from what was already an all-time low of 2.68% in the third
quarter.
What's more, making loans in such an uncertain economy could
prove difficult, in part because lenders aren't sure how to
evaluate customers' risk profiles after months of loan deferrals.
Loan growth decelerated in the fourth quarter, falling by an
annualized 3% from the previous quarter, according to analyst
estimates. And businesses that socked away cash earlier in the
pandemic won't need loans.
"When businesses feel optimistic about the outlook and want to
expand or hire, they've got the cash to do that," said Terry
McEvoy, a bank analyst at Stephens Inc. "They will not need to call
their banker and ask for a loan."
Write to Orla McCaffrey at orla.mccaffrey@wsj.com
(END) Dow Jones Newswires
January 14, 2021 05:44 ET (10:44 GMT)
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