Company / Analytics

Analytics, 16 October 2020

US Banks Q3 2020 results and analysts’ comments

Major US banks reported better-than-expected results this week indicating an improving economy that indicates that the pandemic is different from the Great Recession. JPMorgan Chase and Citigroup reported better-than-expected financial performance and lower-than-expected losses on Tuesday. On Wednesday, Goldman Sachs followed suit beating revenue expectations, even though Bank of America came up short in that category and Wells Fargo missed on earnings.

But analysts, including the banking executives, have cautioned that the continued recovery could falter if policymakers in Washington fail to enact new stimulus measures. Read more on some of the results, what analysts are saying, and the outlook.

Earnings reports

JPMorgan Chase and Citigroup reported better-than-expected financial performance and lower-than-expected losses on Tuesday. On Wednesday, Goldman Sachs followed suit beating revenue expectations, even though Bank of America came up short in that category and Wells Fargo missed on earnings.

JPMorgan Chase kicked off the deluge of results from large financial companies, reporting $9.4 billion in profits, up to 4% from the year-ago period when revenues were down slightly at $29.9 billion. But after nearly $20 billion in credit costs in the first half of 2020, JPMorgan reported just $611 million in credit costs in the third quarter. That figure included a boost from $569 million in reserve releases.

Most of the revenues were from the JPMorgan’s market’s division, which was boosted by increased trading activity. However, the bank reported a decline in net interest income in the wake of Federal Reserve actions to keep rates low to boost the economy.

JPMorgan lifted its forecast for the US economy and now projects a fourth-quarter contraction of 5.4% and a second-quarter 2021 contraction of 3.7%, both incrementally better than their forecasts in the second quarter of 2020.

Chief Financial Officer Jennifer Piepszak said many consumers have higher cash balances than before the pandemic and have avoided taking on debt.

Citigroup

Citigroup reported a 34% drop in quarterly earnings to $3.2 billion behind a 7% decline in revenues to $17.3 billion. The results featured the same basic trends as with JPMorgan, boosted by strong trading results and lower reserves for bad loans.

However, Citi was buffeted by a hit from lower interest rates and a $400 million civil penalty from regulators over lax internal controls announced last week by US authorities. The company’s share price fell sharply during a conference call with analysts when executives were pressed about the settlement.

What analysts are saying?

Banking executives reported that households have been spared bruising delinquencies in the pandemic due to hefty US fiscal relief spending earlier in the year. However, the stalemate in Washington over new stimulus looms as a risk for the US economy.

“It’s (the stimulus) important and it needs to happen as quickly as possible,” said Citi Chief Financial Officer Mark Mason, who added that massive spending from Washington has helped avert a tidal wave of delinquencies so far.

JPMorgan Chase executives warned of a “double-dip” recession if there is not another package. That takes place when the second period of economic contraction follows an initial recovery.

“The people we need to help the most are small businesses and the unemployed,” said JPMorgan Chief Executive Jamie Dimon, who said Washington’s actions will determine whether it needs to take much higher reserves for bad loans.

This should be a tough time for banks. Low-interest rates hurt their profits and with millions of unemployed and consumers strapped for cash, the credit card business is slow. However, banks have put billions aside in reserves to cover losses if a lot of consumers and businesses default on their loans.

Analysts warn that without another round of government stimulus, banks might start to see more consumers and businesses default on their loans. The hope is that the payment relief options can bridge the gap until the virus is contained, and people get back to work and they’re able to resume making the payments”, Bankrate’s Greg McBride said.

Outlook

According to Fitch Ratings, while the largest U.S. banks reported stronger results, underlying data points to persistent uncertainty that continues to support a negative sector and rating outlook. In particular, profitability for those banks with large capital markets activities continues to benefit from market volatility, corporate issuance volume as well as an expected recovery in advisory revenue.

Fitch noted that U.S. banks broadly will face a challenging earnings environment on a core, operating basis, as markets and mortgage-related revenue normalizes in the latter part of 2020 and into 2021.

Banks reported the much lower levels of loan loss reserve builds than in the first half of 2020 as the domestic economic backdrop has not worsened over the last quarter, a trend that is expected to continue for the remainder of the earnings reporting season. At the same time, reported loan deferrals dropped but still present a challenge in forecasting ultimate losses, especially in combination with government stimulus programs that appear to generally remain in customer deposit accounts, Fitch noted.

Positively, Fitch obverses that U.S. banks have continued to build regulatory capital ratios in this challenging operating environment. Fitch attributes the build partly to temporary regulatory relief received at the onset of the pandemic, while some of the builds have also been driven by a reduction in risk-weighted-assets as corporates have been able to access the capital markets and/or have continued to pay down bank lines of credit while consumers also pay down debt. However, the absolute level of the capital build is also notable, in Fitch’s view, and has been driven by regulators preventing share buybacks and limiting dividends based on recent profitability.

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