Banks to Give Peek at Sector's Challenges -- WSJ

By Orla McCaffrey 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 13, 2020).

When U.S. banks report first-quarter earnings this week, investors will get the best impression yet of how the coronavirus pandemic is weighing on the U.S. financial sector.

The first three months of 2020 presented banks with their most formidable challenges in recent memory -- near-zero interest rates and a free-falling U.S. economy that threatens to upend almost all their business lines.

JPMorgan Chase & Co. and Wells Fargo & Co. report results Tuesday. Goldman Sachs Group Inc., Bank of America Corp. and Citigroup Inc. follow on Wednesday. Morgan Stanley is expected to report later in the week. KBW analysts expect large banks' earnings to drop by 23% in the first quarter compared with a year ago.

Lackluster earnings will put even more pressure on bank stocks. The KBW Nasdaq Bank Index plummeted 42% in the first quarter, its worst start to a year on record. Share prices of the four largest banks were down between 35% and 47% in the quarter.

"It should be expected that our earnings will be down meaningfully in 2020," JPMorgan Chief Executive James Dimon said in a letter to shareholders last week.

Other banks have revised or abandoned guidance issued just a few months ago. Ally Financial Inc., one of the country's largest auto-finance lenders, recently withdrew its 2020 forecast, citing uncertainty around the pandemic's damage to U.S. businesses and households. A "significant number" of the company's auto customers have chosen to defer their payments for as many as 120 days, Ally said.

Investors will want to know what the bank results signal about the broader economy.

Delinquent loans and charge-offs were at or near postcrisis lows going into the year. Analysts think delinquencies remained relatively low in the first quarter as well. But many lenders are offering forbearance programs that could mask loans under pressure.

Commercial and industrial loans, used by small businesses, are the first category where delinquencies will rise, analysts said. And loans to companies in industries essentially shut down by the virus -- hospitality, tourism, restaurants -- could soon be hit hard.

Analysts expect that banks will squirrel away more money for potential loan losses, which could drag down results.

The fall in interest rates will also weigh on earnings. The Federal Reserve slashed its benchmark rate to near zero last month to try to bolster a U.S. economy starting to show signs of weakness.

Falling interest rates erode banks' profits by limiting how much they can charge on loans. Net interest margin, which measures how profitably banks can lend out depositors' funds, is expected to decline.

Fee income, often a life vest for banks amid declining interest rates, will have little power to right the ship this time. Many of the strategies banks are employing to deal with the economic crisis, such as waiving certain fees, will drag down nonlending income. And external factors, including restrictions on corporate travel and a freeze on much M&A activity, will put pressure on banks' payments businesses and corporate advisory businesses.

The pandemic has already damped housing demand. A measure of home-purchase applications recently fell for the fourth consecutive week, to its lowest level since 2015.

The pressure on nearly all parts of the banking business model means banks have few levers to pull to boost earnings. Cutting expenses, a tried-and-true path to improved profit, will be hard when the banks are spending money to deal with the pandemic -- including bonuses for front-line workers, equipment for employees to work from home and the deep cleaning of branches and corporate offices.

An exception will be trading arms, which likely benefited from the 20% drop in the S&P 500 in the first quarter.

Write to Orla McCaffrey at [e-mail]

(END) Dow Jones Newswires

April 13, 2020 02:47 ET (06:47 GMT)

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