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Bank Earnings: Expect a Messy Quarter and a Peek at 2021

By Orla McCaffrey 

2020 was a whiplash kind of year for U.S. banks. When the firms start reporting fourth-quarter earnings this week, investors will want to know if they should expect another.

The spring and summer of 2020, when the coronavirus pandemic first started to ravage the U.S. economy, looked bad for banks. Profits plunged as they set aside money for bad loans. So did their stock prices. But by the fall, things had improved. Strong mortgage demand, healthy trading revenue and an economy kept afloat by generous government stimulus helped insulate the banks from a worst-case scenario.

What isn't clear now is how long those boosters can last.

"The fourth quarter is going to be messy," KBW analyst Brian Klock said. "But the real focus is going to be what 2021 is going to look like."

JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. report results Friday. Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley follow next week.

KBW analysts expect per-share bank earnings to fall 8% in the fourth quarter compared with the same time in 2019. They also expect profits to fall compared with the third quarter, when some of the largest banks delivered better-than-expected results.

Net charge-offs are expected to rise in the fourth quarter from the third but remain far below historic highs, analysts said. Concerns over deteriorating credit quality ate into profits in 2020, when banks set aside billions of dollars to cover potential losses. Banks and analysts have lowered their loan-loss estimates since the pandemic's early days, but those could rise again if the current jump in coronavirus cases further slows the economic recovery.

Banks are expected to announce plans for stock buybacks, one of the main ways they return capital to shareholders. The Federal Reserve stopped buybacks at big banks last year, a move to preserve capital in an unsettled economy, but said in December that banks could restart them with limitations.

The unusual nature of the coronavirus recession padded bank revenue in ways that few could have predicted at the pandemic's outset. Mortgage originations, a key source of fee income, reached record levels as well-off families looked for homes with more space. The stock market, boosted by tech companies that profited from the stay-at-home economy, soared to records, lifting trading desks. Stimulus checks, loan deferrals and expanded unemployment helped many consumers and businesses, driving loan defaults lower -- not higher -- for some companies.

Bank stocks mounted an impressive recovery in the fall after trailing the broader market for much of 2020. The KBW Nasdaq Bank Index rose 34% between October and December, compared with a 12% increase in the S&P 500.

"We're going to look back on 2020 and think 'Oh my God, what in the world did we have to live through?'" said Marty Mosby, director of bank and equity strategy at Vining Sparks. "But in reality, things happened in a way that definitely helped bank profitability."

Still, mortgage levels are expected to decline in 2021. Rising coronavirus cases and job losses threaten to keep consumers at home and squeeze their income, which would likely weigh on credit-card spending and leave some customers unable to pay their bills.

Low interest rates, which crimp bank profits by limiting what banks can charge on loans, are also a challenge. The Fed slashed its benchmark rate to near zero last March. Analysts expect net interest margin, a key measure of lending profitability, to decline even from what was already an all-time low of 2.68% in the third quarter.

What's more, making loans in such an uncertain economy could prove difficult, in part because lenders aren't sure how to evaluate customers' risk profiles after months of loan deferrals. Loan growth decelerated in the fourth quarter, falling by an annualized 3% from the previous quarter, according to analyst estimates. And businesses that socked away cash earlier in the pandemic won't need loans.

"When businesses feel optimistic about the outlook and want to expand or hire, they've got the cash to do that," said Terry McEvoy, a bank analyst at Stephens Inc. "They will not need to call their banker and ask for a loan."

Write to Orla McCaffrey at orla.mccaffrey@wsj.com

 

(END) Dow Jones Newswires

January 14, 2021 05:44 ET (10:44 GMT)

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