Pro Perspectives 7/13/20

July 13, 2020

Second quarter earnings kick into gear this week.  We’ll hear from the big four banks in the coming days. 

JP Morgan and Citi will report tomorrow before the open.  We hear from Wells Fargo tomorrow too.  And then Bank of America on Thursday. 

We should expect all of corporate America to take this opportunity, in their Q2 earnings reports, to put all of the bad news they can muster on the table. 

In a widespread economic crisis, this is their chance to write down the value of anything they can justify, take loss provisions on as much as they can, and set the bar as low as they can, so that in the quarters ahead, they can outperform expectations. 

That said, let’s take a look at what the market is expecting from the big banks.

The market is looking for a 63% decline in earnings at JP Morgan, compared to the same period last year.  The consensus view on Citi is an 85% decline (yoy EPS).  At Wells Fargo, their looking for a swing from $1.30 a share in Q2 of 2019, to a loss of 20 cents a share.  And at Bank of America, their looking for a 63% decline.  

Now, we’ll see the kitchen sink of loan loss provisions (i.e. guesses on what losses may materialize in the future) in these reports.  They will put these out there, because they can.  But remember, the Fed, Treasury and Congress have already pumped trillions of dollars into the economy to keep consumers and businesses solvent. That’s a direct backstop (protection) against these “provisional loan losses.”   

Add to that, the Fed has created tremendous revenue opportunities for the banks. They’ve eliminated the reserve requirement for banks — taking the ratio from 10% to zero.  The banks are now incentivized to make an infinite amount of loans.  The Fed has also become a buyer of corporate bonds, reducing risk in the credit markets, which has driven record first half volume in new corporate debt issuance.  That drives investment banking business at the big banks. And the liquidity deluge from the Fed has created a broad stock market boom, which drives trading revenue. 

With all of this said, don’t be surprised if the bank earnings (ignoring loan loss provisions) come in better, and maybe much better, than expected.  We will see.