“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
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.
Wells Fargo’s first dividend in a decade
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.
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.
Greed is making a comeback
The investment banks’ bright spot in the banking industry has been because they pay into revitalizing capital markets.
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.
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.