What to Expect for Bank Earnings: A Bad Quarter, but Not as Bad as Before
By Ben Eisen
The U.S. economy is settling in for a lengthy recovery. Earnings
from the largest banks are expected to make that clear.
When the pandemic hit and the economy mostly shut down, banks
set aside tens of billions of dollars to cover soured loans, took
in record deposits and contended with a Wall Street trading
bonanza. That topsy-turvy start to the year is now giving way to a
steadier new normal.
"Banks have good fundamental health," said Mike Mayo, a banking
analyst at Wells Fargo & Co. "This is a transient hit whose low
was likely in the second quarter."
The largest banks provide something of a real-time proxy for the
economy, which is in an extreme state of flux as millions of
Americans remain out of work and federal stimulus measures wear
Given the uncertainty, bank stocks continued to trail the
broader stock market in the third quarter. The KBW Nasdaq Bank
Index is now down 30% for the year, even though the S&P 500 is
The four largest lenders more than doubled their war chests for
defaulted loans over the first six months of the year and now
believe they largely have enough set aside to handle a potential
spate of distress among consumers and businesses.
Without that hit to the bottom line, profits should be higher in
the third quarter than the second. JPMorgan Chase & Co., Bank
of America Corp., Citigroup Inc. and Wells Fargo are all expected
to show a rebound in per-share earnings from the prior three
months, according to analysts polled by FactSet. Net income for the
banking industry as a whole plunged 70% in the second quarter from
the same period a year before.
Still, there are pressure points. Interest rates remain near
record lows, which will eat into the profits banks make from
lending out money.
Wall Street investment-banking and trading businesses are
expected to turn in a strong performance, but aren't likely to hit
the high mark they did in the second quarter. Goldman Sachs Group
Inc. and Morgan Stanley, which rely more on these units, are
forecast to record a drop in per-share earnings from the second
quarter, according to FactSet.
All told, the biggest U.S. banks are likely to keep getting
bigger. They have been collecting deposits at a rapid clip in
recent years, and that accelerated as the pandemic prompted people
and companies to move cash into their accounts.
But pressure on costs is likely to increase after banks shelled
out money to help employees and consumers when the pandemic hit.
Some banks have again begun to cut employees.
--David Benoit contributed to this article.
Write to Ben Eisen at firstname.lastname@example.org
(END) Dow Jones Newswires
October 12, 2020 00:15 ET (04:15 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.