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

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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.”

For example, JPMorgan had a 69% drop in profits in the first quarter. It set aside some $8.3 billion for loans that are vulnerable to the impact of the coronavirus shutdowns.

“But as bad as this should be [in the second quarter], this should be as bad as it gets” for the big banks, according to Mayo. 

Still, the situation “might not get a lot better if the COVID crisis [goes on] longer,” he added. “It’s a combination of lower interest rates, [and] the [negative] impact to net interest margins and credit losses.”

3. Clarity for the Economy, or a Lack of It

“We have seen some reopening, so things are a bit better” for the economy, Mayo said, “all else being equal — even if [they're] not that much better, given increases in COVID cases.” 

4. Cost

Looking at the stocks of the large financial institutions, “These banks are dirt cheap on an absolute and especially on a relative basis to the market as a whole,” he explained. “Expectations are absolutely low, based on these bank stock valuations.”

He said last week (on CNBC) that the big banks “are priced like they were in the Great Financial Crisis — or worse.”

For long-term investors, now “is the time to buy bank stocks … notwithstanding [the fact that] these are some difficult times,” according to the bank analyst.

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