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8 Big Banks Report Earnings: What to Watch
October 9, 2020
14 min read
Big banks will kick off Q3 earnings on October 13. After two uncertain quarters of reporting, analysts are hoping for more clarity and direction for the remainder of 2020.
During the first half of 2020, significant banks took central reserves and reported significantly lower earnings–an early look at how COVID-19 impacted the economy across sectors. However, this quarter, the nation’s largest lenders are expected to report better earnings after delinquencies came in better than initially feared.
Even with an increase in borrowing, the remainder of 2020 is uncertain primarily due to Congress–will we see another stimulus package to help U.S. households and businesses?
After Q2 earnings, most big banks saw a dropoff in positive sentiment; they are slowly rebounding after financial conferences in September and anticipated Q3 earnings. This chart does not reflect Q3 payments. | Sentiment analysis for JPMorgan Chase, Citigroup, Goldman Sachs, BoA, and Morgan Stanley vs. Peer Median
What were the major trends in an executive commentary last quarter? And what assumptions can we make about their Q3 earnings? We’ve compiled highlights from last quarter’s earnings, including significant themes, executive commentary, and ungated document links to help you prepare for this week’s considerable bank earnings.
Major Banks Earnings This Week:
- October 13: JPMorgan Chase & Co (Before market open)
- October 13: Citigroup Inc (Before market open)
- October 13: Charles Schwab (Before market open)
- October 14: Bank of America (Before market open)
- October 14: Wells Fargo & Co (Before market open)
- October 14: PNC Financial Services Group (Before market open)
- October 14: Goldman Sachs Group Inc (Before market open)
- October 15: Morgan Stanley (Before market open)
- In September, financial service companies gathered at the Barclays Global Financials conference. There, Bank of America CEO Brian Moynihan said he expects to see net interest income drop by $600 million or $700 million in the third quarter. Moynihan said the reserve build would be “very modest,” if anything at all.
- At the Barclays Global Financials conference, JPMorgan Chase CFO Jennifer Piepszak revised the bank’s net interest income down from $56 billion to $55 billion for the year. Piepszak said she expects to see “near zero” in terms of a reserve build for JPMorgan.
- JPMorgan Chase and Bank of America are expected to report $2.06 and $0.44 in earnings per share, topping the two banks’ quarterly profits from earlier this year.
PNC Financial Services Group
Credit & credit extension
William Demchak (Chairman, President, & CEO): “If you looked at the base case we put forward in the second quarter for where the economy will go, it’s pretty similar to what other people are doing. I think what was different was our expectation on credit and not because of what we have on our balance sheet. If you look at metrics on what we have exposed to COVID sectors or what we have in criticized classified or growth in criticized classified, I mean, everything is — we stand out to the good side on that versus peers, and things have been behaving well. Having said all that, we look where we are today; data has been better than what we would have had in our economic forecast.” (Barclays Global Financials NY Conference – Virtual | September 15, 2020)
Loan Growth: William Demchak (Chairman, President, & CEO): On loan growth, H.8 has been weak, and we can talk about that a little bit. And it’s been ineffective, not just because of the bond market and people basically refinancing out at cheap rates in public markets, but also because utilizations are down as business activity is lower, and we’re impacted by that as well. But we benefit on an ongoing basis from kind of our specialty lending areas, which we have an outsized capacity, I think, versus our peers.”
Answer – William S. Demchak: Yes. So I think we said in the second quarter here that when we gave second-quarter guidance that we’d see loan growth down kind of 1% or so, I think we’re going to see it closed down to 4% or 5%, correct me, Rob, if I go wrong here, but — and NII dropping as a result of that. Fee income has surprised us to the upside. So we had fee income dropping quarter-to-quarter. And in fact, we’ll see that grow. So it’s — call it a push, but fee income taking up some of the slack we’re seeing in loan growth expectations.
Answer – Robert Q. Reilly: Yes. To clarify that, Bill, so Jason, our guidance was loan growth down low single digits then it’s likely to be, as Bill mentioned, down mid-single numbers. So a little bit less than what we thought. And then on net interest income, we had said down 1%, and we’ll probably be down a little bit more than that, in line with that lower loan growth.
JPMorgan Chase & Co
Stimulus & recovery:
Answer – Jennifer A. Piepszak: Sure. So Mike, as we close the books for the first quarter, to give it context, we were looking at an economic outlook that had GDP down 25% in the second quarter and unemployment above 10%. So it’s important to note that that kind of gives you a frame of how to think about it, but a lot more goes into our reserving, including management judgment of some like world-class risk management and finance people and other analytics. And so that just gives you a frame of reference.
But there, we did think about several other scenarios that we should contemplate in reserving. And we also thought about the impact; what’s our best estimate of the effects of these particular government programs and our payment relief programs.
Since then, as I noted in my prepared remarks, our economists have updated their outlook and now have GDP down 40% in the second quarter and unemployment at 20%. That’s materially different. Both scenarios, though, do include a recovery in the back half of the year.
Wells Fargo & Co
Balance sheet, NII, and net interest margins stabilizing
Question – Jason Michael Goldberg: Okay. And I guess more near term, I think one of the more significant questions we get is just around net interest income. You talked to a $41 billion to $42 billion NII guide for this year. Maybe given where we are now in the quarter, are you still comfortable with that? And perhaps just talk to where you see NII and net interest margin stabilizing. And just what are you doing with the balance sheet in case this — as it looks like this prolonged low-interest rate environment is going to continue?
Answer – John Richard Shrewsberry: Yes. So it will likely be a little bit worse than that this year. I’d say loan growth has been a little weaker than previously imagined. And prepayment premium amortization and mortgage securities have been a little bit stronger as a result of this sustained rally. So call it, $40.5 billion, something like that, is probably a reasonable estimate for the year on net interest income.
The — so we’re awash in liquidity like everybody else. And in a relatively low loan demand environment, the opportunity to redeploy that insecurity isn’t compelling. We’re doing it by reinvesting mostly in mortgage-related securities as coupons move lower and lower. It’s still a big pickup, and we think an appropriate pickup over treasuries or agencies. And those are the only markets that have the size that we operate in. (Wells Fargo & Co at Barclays Global Financials New York Conference | September 14, 2020)
Question – Jason Michael Goldberg: You kind of cited loan growth as a touch worse than expected. Maybe delve into that a bit. I think expectations were for obviously loan growth to be challenged in the back half of the year. It sounds like it will be a touch worse than you initially thought. Is that coming from more on the commercial side? The consumer side? And maybe talk a bit more into that.
Answer – John Richard Shrewsberry: Yes. For us, it’s more on the commercial side. There’s so much liquidity. Bond markets are wide open. The — our customers, large- and medium-sized customers, are using the bond market to finance themselves. So we see line utilization at a lower percentage level than it has been recently. So the demand for new credit, at least at this point in the cycle, is not particularly robust. And then people are refinancing out into securities.
On the consumer side, it’s an excellent time for a mortgage, but we’re getting lower and lower in coupons, but jumbo mortgage production is vital. Autos are — have picked up certainly from where they were at the beginning of Q2. But I think we’re all being cautious about the size of the credit spectrum that we’re attacking at this point in the cycle in auto, but it is delivering. And in credit cards, lower — credit card spending is more lacking. So credit card receivable generation is now happening at a very high level. And those are mostly the big categories.
We don’t know and — where this will go, but our gut or how we’re thinking about this is this recovery is going to be uneven. I would say that, as a team, we’ve pretty well discounted a uniform v-shaped recovery. The question is it is U-shaped, is it W-shaped, or parts of it L-shaped. And we want to retain a lot of flexibility and capacity to be able to step into the situations that count.
I mean, yes, what I said was that if you take the cards portfolio we have today, which is of better quality than it was back in ’08, and you would destress it for the ’08 financial crisis that, yes, our pro forma loss rates would be 25% to 30% lower than what we experienced in the last crisis.
I think we’re expected to be there for our clients in a period like this. And you’ve seen our CET1 ratio drop to 11.2% this quarter. And as the needs of our clients evolve, we’re going to be there for them, and if that means that our ratio takes more pressure, then we’ll manage through that. If we were to drop below the 10% you referenced, there’s still plenty of room between that and the use of the buffer that the regulators have authorized.
With that said, given the adverse impact of COVID-19, we no longer expect to deliver the RoTCE of 12% to 13% for the entire year. Based on what we are seeing today, on the top line, we expect the revenue trend in the latter part of March and the beginning of April, characterized by COVID-related lower level of activity, particularly in banking, and our consumer franchise will continue through much of the second quarter. And in our Markets business, revenue should reflect the broader industry. The first quarter is typically the strongest. And clearly, this year was solid, so that we would expect some normalization in activity levels here. And finally, we will see the more pronounced impact of the lower rate environment on the top line.
Looking ahead to the second quarter and the remainder of 2020, we do expect a higher level of losses given our current outlook. And as our view continues to evolve, it is also reasonable to expect additional increases in credit reserves if our outlook deteriorates further. However, given the credit quality of our portfolio, we remain confident in our ability to maintain our overall strength and stability as well as continue to support our customers and win new business. Undoubtedly, every company around the world will feel an economic impact from this unprecedented situation. Still, we are confident that Citi will emerge in a position of strength, having demonstrated that we lived up to our stated objective to be an indisputably solid and stable institution and having shown that we stood by our clients and supported our customers and employees ring this challenging time.
Bank of America
On consumer spending
So when we weighted a scenario that produced a recessionary outlook, which included a significant drop in GDP in the second quarter with negative GDP growth rates extending well into 2021, we also considered the impact of various groups of credits and stressed industries. And while small relative to the impact of scenario weighting, we incrementally factored that analysis into the sizing of our reserve build.
There are many unknowns, including how government, fiscal and monetary actions will impact the outcome, but we can also try to consider that. And we also had to consider how our deferral programs will impact losses. But perhaps the biggest unknown is how long economic activities and conditions will be significantly affected by the virus.
On Q1 and Q2:
Now we didn’t have a full quarter of being in absolute crisis, we had a half quarter or 2/3 of a quarter being whole crisis, but boy, it was a final crisis. And for this fund, we have come through that and generated $9.5 billion in revenue, and that’s the net of the deferred compensation plans, which puts us a bit over $10 billion in revenue, effectively flat to a year ago. I thought it was remarkable.
Now maybe it’s my job to think that’s remarkable. But I did think it was outstanding. I believe the franchise’s stability, breadth, and diversification clearly showed an underlying sort of backstop of our performance. I can’t tell you it’s 10% ROTCE. I know coming into the second quarter, we’ll have less market volume, lower interest rates, and lower asset prices at the moment; However, we reprice our assets every month and probably have lower non-comp expenses. So I suspect, in the second quarter for various reasons, there will be a lot of things going back and forth.
So is 10% a bottom? I don’t want to call that now because I don’t know how deep this recession is going to be. But given what we went through to have produced, that felt like a resilient franchise.
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