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Large bank income will: “It will be really ugly”

JPMorgan Chase (JPM), Bank of America as well Citigroup (C) everyone is expected to reveal their profits in the second quarter crashed by 50% or more. Wells Fargo (WFC) will likely lower its coveted dividend and announce the scandal-ridden bank’s first quarterly loss since the financial crisis.

“2020 has been a disaster,” said Jim Shanahan, who covers banks at Edward Jones. “It wasn’t the banks’ fault. It was as if we had a foreign invasion during the second quarter.”


The biggest driver of shrinking profits – or pure losses – in the Wells Fargo case – is the fact that banks are preparing to deal with a pile of toxic loans caused by the pandemic.

$ 2.1 trillion in credit losses

Since then, Corporate America has experienced a wave of bankruptcies, including applications in recent weeks by Hertz, J.Crew, Chesapeake Energy and Brooks Brothers.

Analysts agree that the banks will be forced to further increase loss-absorbing reserves – but the real issue is how much.

“It’s going to be really ugly,” said Kyle Sanders, also a banking analyst at Edward Jones.

Last week, S&P Global Ratings warned that banks around the world will ultimately suffer credit losses of approximately $ 2.1 trillion between this year and next year.

In addition to bankruptcies and high unemployment, the bank’s profitability is crushed by extremely low interest rates. Banks make money from the spread between interest rates on loans and what is paid out on deposits. Right now, this spread is very narrow, which makes it challenging to make money.

Worse, the Federal Reserve has signaled that zero interest rates will not disappear anytime soon.

“Core income power is still a challenge in a ZIRP [zero interest rate policy] the world, “Jefferies analyst Ken Usdin wrote in a note to customers last week.

That is why bank shares have been dropped this year. The KBW Bank Index (BKX)has lost more than a third of its value this year, badly dropping the 2% fall for the S&P 500 2020.

Wells Fargo’s first dividend in a decade

Among the big banks, Wells Fargo is the biggest loser, with its stock down 54 percent so far this year. Last month, Wells Fargo warned that it will likely lower its dividend for the first time since the Great Recession.

In fact, Wells Fargo is the only major bank expected to turn into a loss in the second quarter, a point that underscores how much it fought even before the pandemic.

The problem for Wells Fargo is that it has fewer financial levers to pull than its peers.

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Unlike its competitors, Wells Fargo can no longer make loans to offset low interest rates. That’s because Wells Fargo is still banned by the Federal Reserve from growing its balance sheet (besides making small business loans under the federal government’s Paycheck Protection Program). I think we need a brief (one sentence), for those who may not remember why WF is under the thumb of the Fed.

And Wells Fargo cannot cut costs too deeply because its scandals have forced it to increase compliance and technology spending.

Wells Fargo is not the only major bank with a shrinking share price. JPMorgan, Bank of America and Citigroup have all lost about a third of their market value this year.

Super regional banks PNC (PNC) and US Bancorp has seen its share prices fall by about 40% apiece. Both are expected to have a sharp drop in profits this week.

Greed is making a comeback

The investment banks’ bright spot in the banking industry has been because they pay into revitalizing capital markets.

Goldman Sachs (GS) is only down 12% compared to the year. Morgan Stanley (MISS)is only 5% off. Both companies, which rely more on Wall Street than Main Street for most of their profits, are expected to post more modest revenue cuts than their competitors.
The pandemic caused the capital markets to freeze in March, but the Federal Reserve has created a huge recovery. It helps the Fed, for the first time ever, control corporate debt purchases, including rubbish bonds.
investment Banks also carries fees [TIED?] to an increase in stock sales and stock market introductions, including debuts in recent months by software company ZoomInfo, Albertsons and online insurance company Lemonade. US companies raised nearly $ 190 billion through inventory sales in the second quarter – the most on Dealogic records dating back to 1995.

Reviving pandemics means more credit losses

In addition to navigating turbulent markets, banks are also struggling the rising coronavirus infections in Sun Belt states including Texas, Arizona and Florida. And big banks have huge exposure to coronavirus hotspots.

Bank of America had $ 591 billion in deposits in the top 50 counties in the United States that have seen the most recent coronavirus infections in the past month, according to a Morgan Stanley analysis. JPMorgan ($ 427 billion), Wells Fargo ($ 389 billion) and US Bancorp ($ 151 billion) followed the banks with the most exposure in dollars to these counties.

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The health crisis in these areas and the risk of renewed restrictions will cause “increased stress” for local businesses and potentially greater credit losses for banks, Morgan Stanley said.

Add it to the list of obstacles that banks are facing right now.

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