Q2 Could Be ‘Earnings Hell, Again’ for Banks: Analyst

An analyst who called the first quarter “earnings hell” for the big banks says it should be “earnings hell, again,” in the second quarter — namely due to higher credit (or loan loss) provisions and the impact of lower interest rates. 

Mike Mayo, a bank analyst with Wells Fargo, made the remarks recently on CNBC, just ahead of Q2 earnings season for financial institutions, which kicks off early Tuesday with reports from JPMorgan, Citigroup and Wells. Goldman Sachs and Bank of New York Mellon report Wednesday, followed by Bank of America, Morgan Stanley and Charles Schwab on Thursday. 

Mayo, in fact, thinks this quarter might be the worst since the Great Financial Crisis, with earnings for some of the banks down significantly. “We think [some] earnings will be down by a half year over year … ,” Mayo said Monday on Bloomberg TV. “This is a tough, tough quarter.”

“When you go shopping for diamonds, you have the four Cs,” the analyst explained, referring to color, clarity, cut and carat weight. “We [also] have the four Cs as it applies to banks and bank stocks.” 

1. Comprehensive Capital Analysis and Review

The Federal Reserve’s annual CCAR exercise is used to assess the capital needs of the largest U.S. banks and aims to determine if the banks’ planning practices adequately assess their future capital needs in order to keep lending and operating during times of economic and financial distress.

“This will be the first earnings season when we can ask banks about the [current] stress test and when they expect to resume to [stock] buybacks … and what other actions [they] will take,” Mayo said.

“Bank balance sheets are strong,” he explained. “We still call this an income statement recession and not a balance sheet recession.”

2. Credit and Credit Losses

As for how the banks are doing in mid-2020, “We do think provisions will be higher,” said Mayo, “and for that reason, this will be earnings hell and worse than the first quarter.”