Banking On A Rough Earnings Season For Banks

Three months seems a lifetime ago, pre-coronavirus pandemic, pre-recession, pre-lockdown, pre-bailouts.

The stark changes in all facets of daily life for the U.S. (and international) consumer and the businesses that serve them will be center stage as earnings season gets underway, starting, as always, with a slew of big banks.

This week, Wells Fargo, JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs will report results for the March quarter and are likely to show volatility, to put it mildly, rocked by the impacts of the coronavirus, which spread like wildfire through the world beginning in January.

March, of course, marks the month during which untold millions of businesses were shuttered, and, in the past few weeks, as many as 16 million Americans filed for unemployment.

The last time we had earnings season, stretching from mid-January into the end of February, banks pointed to the continued strength of the U.S. consumer, where spending was strong across cards, where auto loans remained resilient.

Tuesday (April 14) will see reports from Wells Fargo and JPMorgan while Wednesday will mark releases from Citigroup, Bank of America and Goldman Sachs.

The pressures will come across all fronts.

To set the stage, and as communicated by JPMorgan CEO Jamie Dimon in a letter to shareholders earlier in the month, “we don’t know exactly what the future will hold — but at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008. Our bank cannot be immune to the effects of this kind of stress.”

Those words could be applied to the financial services sector at large. We wouldn’t hazard to take a guess at the true breadth and depth of the coronavirus, but it’s a safe bet to assume that management commentary will delve into deferred mortgage, credit card and auto loan payments.

As reported by the Financial Times over the weekend, joint estimates by Oliver Wyman and Morgan Stanley predict that even with rapid economic recovery seen within six months, profits would decline by 100 percent in 2020 as compared to 2019.

Elsewhere, as reported by MarketWatch, Keefe Bruyette & Woods slashed earnings estimates for the sector at the end of last month, projecting that profits for “universal banks” would be down by 58 percent for 2020 and 50 percent for 2021, tied to a spike in unemployment and loan losses.

To get a sense of how strong consumer spending was at the end of 2019 (which marked the end of the fourth quarter), consider the fact that JPMorgan Chase said that card, merchant services and auto revenue were up 9 percent driven by higher card net interest income (NII). Card loan growth was up 8 percent, sales were up 10 percent, and management pointed to a “strong and confident consumer during the holiday season.”

Citi, for another example, said branded card sales were up 10 percent in the quarter. Goldman, which has been moving downstream to capture more share of banking wallet in the U.S. and the U.K., has said Marcus deposits were $60 billion at the end of the year. The company said volume was $2 billion from the credit card lending tied to the launch of the Apple Card.

Increasingly Digital

Beyond the murkiness of what may lie ahead in terms of troubled loans, deferrals and defaults, other trends are likely to emerge.

With sheltering in place, we can expect that digital means of transacting and banking will gain ground.

Bank of America’s numbers showed that peer-to-peer (P2P) payments were up 76 percent year over year in the fourth quarter. Overall, consumers made 95 million payments worth $23.8 billion using Zelle. And as PYMNTS reported in this space back in January, as much as 29 percent of all consumer sales were done digitally. Roughly 53 percent of all digital sales came across mobile devices. For Wells Fargo, digital (online and mobile) active customers were up 4 percent to 30.3 million. Mobile active customers were up 7 percent to 24.4 million.

These types of numbers may be among the (relative) bright spots in what might be a rough series of earnings calls this week and beyond. The virus itself may hasten the embrace of banking done by bits and bytes.