Bank Stocks Are in a Ditch. Earnings Won't Change That.
April 12 2020 - 07:29AM
Dow Jones News
By Orla McCaffrey
When U.S. banks report first-quarter earnings this coming week,
investors will get the best impression yet of how the coronavirus
pandemic is weighing on the U.S. financial sector.
The first three months of 2020 presented banks with their most
formidable challenges in recent memory -- near-zero interest rates
and a free-falling U.S. economy that threatens to upend almost all
their business lines.
JPMorgan Chase & Co. and Wells Fargo & Co. report
results Tuesday. Goldman Sachs Group Inc., Bank of America Corp.
and Citigroup Inc. follow on Wednesday. Morgan Stanley is expected
to report later in the week. KBW analysts expect large banks'
earnings to drop by 23% in the first quarter compared with a year
ago.
Lackluster earnings will put even more pressure on bank stocks.
The KBW Nasdaq Bank Index plummeted 42% in the first quarter, its
worst start to a year on record. Share prices of the four largest
banks were down between 35% and 47% in the quarter.
"It should be expected that our earnings will be down
meaningfully in 2020," JPMorgan Chief Executive James Dimon said in
a letter to shareholders last week.
Other banks have revised or abandoned guidance issued just a few
months ago. Ally Financial Inc., one of the country's largest
auto-finance lenders, recently withdrew its 2020 forecast, citing
uncertainty around the pandemic's damage to U.S. businesses and
households. A "significant number" of the company's auto customers
have chosen to defer their payments for as many as 120 days, Ally
said.
Investors will want to know what the bank results signal about
the broader economy.
Delinquent loans and charge-offs were at or near postcrisis lows
going into the year. Analysts think delinquencies remained
relatively low in the first quarter as well. But many lenders are
offering forbearance programs that could mask loans under
pressure.
Commercial and industrial loans, used by small businesses, are
the first category where delinquencies will rise, analysts said.
And loans to companies in industries essentially shut down by the
virus -- hospitality, tourism, restaurants -- could soon be hit
hard.
Analysts expect that banks will squirrel away more money for
potential loan losses, which could drag down results.
The fall in interest rates will also weigh on earnings. The
Federal Reserve slashed its benchmark rate to near zero last month
to try to bolster a U.S. economy starting to show signs of
weakness.
Falling interest rates erode banks' profits by limiting how much
they can charge on loans. Net interest margin, which measures how
profitably banks can lend out depositors' funds, is expected to
decline.
Fee income, often a life vest for banks amid declining interest
rates, will have little power to right the ship this time. Many of
the strategies banks are employing to deal with the economic
crisis, such as waiving certain fees, will drag down nonlending
income. And external factors, including restrictions on corporate
travel and a freeze on much M&A activity, will put pressure on
banks' payments businesses and corporate advisory businesses.
The pandemic has already damped housing demand. A measure of
home-purchase applications recently fell for the fourth consecutive
week, to its lowest level since 2015.
The pressure on nearly all parts of the banking business model
means banks have few levers to pull to boost earnings. Cutting
expenses, a tried-and-true path to improved profit, will be hard
when the banks are spending money to deal with the pandemic --
including bonuses for front-line workers, equipment for employees
to work from home and the deep cleaning of branches and corporate
offices.
An exception will be trading arms, which likely benefited from
the 20% drop in the S&P 500 in the first quarter.
Write to Orla McCaffrey at orla.mccaffrey@wsj.com
(END) Dow Jones Newswires
April 12, 2020 07:14 ET (11:14 GMT)
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