The health of the US third-quarter reporting season will get a first up checkup this week with the country’s biggest banks releasing their September 30 results.
While initial estimates for the quarter are for another slide in earnings for the S&P 500, the major banks are expected to do better than many other sectors.
US analysts expect earnings at S&P 500 companies to have dropped about 20.5% in the quarter from a year ago, according to IBES data from Refinitiv.
FactSet has a similar forecast and points out that has been revised from a forecast on June 30 for a 25.3% slide.
It will be the third successive quarter of falling earnings. June quarter earnings fell 31.4%, which was better than early estimates above 40%. March quarter earnings fell 14%.
Tomorrow sees JPMorgan Chase and Citigroup reporting, Wednesday will see Bank of America, Wells Fargo, and Goldman Sachs releasing their quarterlies, while Thursday its the turn of Morgan Stanley.
Analysts expect the US banks to report lower earnings than last year’s as banks contend with the sluggish, but improving, economy, low-interest rates which are expected to remain at rock-bottom levels for years to come, and weak loan growth.
These will continue to weigh down on net interest income.
But income from bond trading, especially mortgages and floats might help the big banks to do a bit better than expected.
And banks have already struggled this year with the pandemic and lockdowns and regulators hitting results and payouts.
The Fed has told the banks to limit their dividends and banned buybacks until the end of 2020.
The sector is down by roughly 30% this year leaving the group trading only slightly above tangible book value. Some names, such as Citigroup and Wells Fargo, are trading below book value.
Morgan Stanley (down 4.5% year to date) and Goldman Sachs (down 9.5%) are the best performed of the big banks in 2020. JPMorgan shares are down 27%, Bank of America shares lost 28%, Wells Fargo shares have shed 54% and Citi shares are down 44% so far this year.
Analysts don’t expect that the banks will have to add much to their reserves for bad loans, given the billions they set aside in the first two quarters.
But because the stuttering nature of the economic recovery is uncertain, analysts are staying cautious.
In his own bank earnings preview report for clients, Odeon Capital Group analyst, the well regarded Richard Bove said third-quarter provisions from the banks would be “the most critical of any number produced in the quarter.”
He said he expects “a relatively good set of numbers,” but warned that negative surprises would cause meaningful declines for the stocks, even from their current discounted valuations.
Bove cited a decline in commercial and industrial loans and “moderate growth elsewhere” as among the reasons provisions would decline, but also wrote that “it is beginning to appear that the banks may have over-reserved in the first half.”
But it’s just not banks reporting – Big pharma, Johnson and Johnson reports (with news of its coronavirus vaccine top of the list), Delta and United Airlines are down to report, Honeywell International, Schlumberger, Blackrock, and Alcoa along with smaller banks like US Bancorp and PNC Financial.
And Apple releases its 2020 iPhones which will be 5G capable. The function is on Tuesday and starts around 4-5 am Sydney time on Wednesday.
