A lethal combination of ultra-low interest rates, credit worries, a steep economic slowdown, and tough government regulations ganged up on big banks this year. Despite that, expectations for the group’s Q3 earnings performance are on the rise.
Granted, the numbers don’t look like something to throw a party over, with research firm FactSet predicting cumulative Financial earnings to fall 19.4% from a year ago. The good news is that those expectations look a lot sunnier than where analysts were back in June, when they predicted a Financials Q3 earnings cratering of 34.4%.
Why the improvement? For one thing, many banks benefit from the energetic capital markets and the trading revenue they provide. Second, low rates have their good side, encouraging more loan activity.
Some of the big banks leading the upward earnings expectations meter include JP Morgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co (NYSE: WFC), FactSet reported. It appears likely they both could have relatively positive Q3 results despite all the headwinds they’ve faced and continue to face in this rough 2020.
The same goes for Citigroup Inc (NYSE: C), which, like JPM, is expected to report Q3 earnings early tomorrow. Those will be followed Wednesday morning by WFC.
Before zeroing in on individual banks, let’s scroll back for a broader view. Big banks haven’t performed well in the market this year, but they’ve generally done a great job setting aside money for possible credit losses and cutting costs. This could position most of them pretty nicely for any economic rebound once the pandemic passes.
That said, the credit loss provisions compressed earnings earlier this year, and it wouldn’t be surprising if we see additional money put aside for that this quarter.
If there’s positive news on a vaccine or treatment in coming months, the banks could get an outsize benefit, analysts say. That’s partly because their businesses are so exposed to the broader economy, and also because their shares generally remain more beaten down than many other sectors. The S&P 500 Financial sector was recently off more than 19% year-to-date, the worst performance of any sector in 2020 aside from Energy.
One possible worry is any changes in Washington following the election. Banks have generally enjoyed a rollback of regulations recently, but November’s voting could potentially mean a more active Treasury Department in coming years. It’s possible bank executives might be asked on their earnings calls to speculate about the election and its potential impact on their companies and the economy.
Bank stocks also remain bogged down by the Fed’s restrictions on dividends. The Fed put capital restrictions in place in June after it released the results of its annual stress tests. Many banks had already halted share repurchases in March, and buybacks historically accounted for roughly 70% of the banks’ capital return to shareholders, Barron’s noted. The restrictions on dividends might have weighed on investor interest in the sector.
The Fed also announced in June that the banks would have to undergo a second stress test this year due to economic uncertainty and that the results would be released before the year ends.
Kicking Off Earnings Season With JP Morgan Tomorrow
JPM gets the ball rolling early tomorrow. As always, investors will likely listen closely to any words from the company’s CEO, Jamie Dimon. Like few other Wall Street leaders, Dimon’s thoughts can help set the tone for earnings season, and if he likes the economic and industry trends he sees, that could potentially give banking stocks and the entire market a psychological boost.
Things to listen for from Dimon include his take on the relatively improved economic data seen lately (other than the disappointing payrolls number for September), and when and whether JPM might be able to cut back on the credit loss provisions it’s …