Major U.S. banks to report credit cycle information in Q1 reports: for how long, how much

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It is clear that the coronavirus pandemic has triggered a dizzying economic collapse; how long it lasts and how much damage it leaves behind remains unclear.

These are key variables in determining whether a potential wave of missed payments by borrowers will turn into massive burdens on banks in the coming months, which could jeopardize dividends and even create a need for additional capital. Analysts and investors will be watching first quarter earnings reports closely for information on how much banks are setting aside for credit losses and early loan forbearance numbers to better understand how the slowdown could take place.

While banks don’t have to record the coronavirus-related breaks they give borrowers as defaults or distressed debt restructurings, analysts widely expect credit loss spending to rise sharply . Advance provisions required under the new accounting rules could combine with income squeezed by low interest rates to hammer first quarter results, and some analysts are forecasting losses at major banks for the full year.

“We expect very large provisions this quarter,” especially with the current standard of expected credit loss, DA Davidson analyst David Konrad said in an interview. Markets will examine how banks determine reserve levels and what asset classes they seek to “close” with large allocations.

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Due to the CECL, which requires banks to create reserves for life loan losses on the basis of a sharply deteriorated macroeconomic outlook, Konrad expects the largest allowances to be made in the first quarter. , although there is a lot of uncertainty. If a bank assumes 12% unemployment and the actual figure is higher, “there will be another build-up of reserves,” Konrad observed.

The uncertainty over the timing and extent of credit losses is evident in the widening range of analysts’ estimates for Q1 EPS. At the high end, estimates have not moved significantly since before the Federal Reserve’s emergency rate cut on March 3, an opening round in the fight to cushion the economy amid the threat of a pandemic. was getting sharp. But for JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co., the lowest estimates were 30% to 73% lower than the highest forecast as of April 8, according to data from S&P Global Market Intelligence.

On the downside, Instinet analysts forecast negative EPS for 2020 at Fifth Third Bancorp, Huntington Bancshares Inc., KeyCorp and Regions Financial Corp. among eight banks with more than $ 100 billion in assets in their coverage universe, mainly due to credit charges. They also predict that a tightening in underwriting would cause lending growth to slow or decline despite a recent increase in corporate borrowing on lines of credit.

Instinet’s projections reflect a baseline scenario where unemployment peaks at 10.4% in the second quarter and declines to 8.5% in the fourth quarter. Some banks may have to cut dividends, Instinet warned in an April 7 report.

Credit Suisse analysts predict in an April 6 memo that the early CECL provisioning could lead to first-quarter losses at consumer-focused financial institutions including Discover Financial Services and Capital One Financial Corp. short and compensated by government relief efforts and loan forgiveness. They modeled losses similar to the two relatively mild recessions over the past three decades and predicted that most companies would be profitable over a two-quarter period.

Keefe Bruyette & Woods analysts cut their 2020 EPS estimates at JPMorgan, BofA, Citi and Wells Fargo by 55% or more in a March 31 note, and predicted that Citi would post a loss in the second quarter of 2020, as ‘They expect the bank’s provisions for credit losses to peak. Overall, the revisions were primarily driven by higher expected credit losses, reflecting poorer projections for unemployment and other economic conditions.

Analysts predict that JPMorgan will have to repay nearly 5.5% of its roughly $ 1,000 billion in loans from 2020 to 2022, compared to about 3.5% at Wells Fargo, which has a smaller credit card business.

“We believe that the business disruption following COVID-19 will last longer and that currently announced government programs will be less effective than expected,” KBW analysts said.

Despite expectations of rising credit costs, even analysts with a relatively bearish outlook are finding value in some banks after a sharp sell-off in trading prices.

KBW analysts said they remain wary of bank stocks given uncertainties about the economic outlook and hopes sentiment will remain weak until provisions peak. But even as they cut BPA projections for JPMorgan, they raised the company’s rating for “outperforming” relative to “market performance,” saying it should be able to use its “balance sheet” to win. market share and come out of the recession stronger. “

Konrad expects the recovery to be prolonged, “even if we reopen the economy this summer”.

“Some businesses will be lost,” he said. “Not everyone will find a job.”

Nonetheless, he argued that the banks have strong underlying earnings power and that in a scenario involving two quarters of “very high unemployment” followed by improvement, the big banks can maintain current dividend levels.

“We’re going to see a big hit for comebacks this year,” he said. But “on the whole we remain quite constructive” on the sector.

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