What’s happening: The biggest Wall Street banks are all set to kickstart the third-quarter earnings season.
What happened: Banking stocks have not been the best performers year to date, with the pandemic hurting business lending and forcing financial institutions to set aside provisions for bad loans.
JPMorgan Chase and Citigroup, scheduled to report their third-quarter results today, will set the tone not just for the banking sector but the overall US stock market for the current earnings season.
What are the expectations: Although earnings are expected to decline versus pre-covid-19 levels, various analysts have projected an improvement from the previous quarters.
- JPMorgan is expected to report a 6.2% decline in revenues to $28.21 billion, and a 16.4% downturn in earnings to $2.24 per share.
- Citigroup’s revenues are projected to decline by 7.8% to $17.13 billion, while earnings could tumble 56.9% to 85 cents per share.
Why it matters: Leading banks in the US have been forced to set aside more cash to prepare themselves for the expected rise in bad loans. With the pandemic crisis persisting, the amount of provisions required remains unpredictable.
Despite credit loss provisions hurting earnings, the additional cash could position banks well when the economy does begin to recover.
On the other hand, banks are benefitting from higher trading revenues due to volatility in the stock market. The low interest rate environment has also helped financial institutions push more loans.
The Federal Reserve’s limit set for dividends has also kept banks in the spotlight. Apart from this, the Fed has imposed various restrictions for banks after releasing results from its latest stress tests. Banks are scheduled for another stress test, the results of which will be released at the end of the year.
News like this has impacted investor sentiment for banking stocks through the coronavirus crisis. Sentiment has also been hurt by banks pausing their share buyback plans in March.
How shares performed so far: JPMorgan’s shares gained 1.2% to close at $102.44 on Monday, while Citibank’s stock added 2.1% in anticipation of the third-quarter results.
What to watch: Any encouraging news related to a decline in infections or a covid-19 vaccine could lift banking stocks, as financial institutions are highly exposed to the state of the overall economy.
Markets would be monitoring earnings from big banks, as commentary from their top management team is expected to set the tone for the third quarter earnings season.