By Philip van Doorn, MarketWatch
The first quarter of 2020 was the worst on record for two broad bank-stock indexes. Investors quickly fled the group for fear of loan losses springing from the quick spike in unemployment caused by the coronavirus crisis.
That’s why, as earnings season begins, investors and the financial media ought to stop focusing on quarterly results and consider a difficult economic cycle through 2021.
Whether a bank “beats” or “misses” first-quarter earnings estimates will be meaningless, because the results will be lowered by a tremendous increase in provisions for loan loss reserves.
Most analysts have cut their full-year earnings estimates for the largest U.S. banks. However, the consensus estimates are dulled by “stragglers.”
For example, four analysts polled by FactSet who cover Bank of America /zigman2/quotes/200894270/composite BAC +5.81% haven’t updated their estimates since before Feb. 19, when the S&P 500 hit its last closing record. In other words, those analysts (as of 10 a.m. April 7) haven’t yet incorporated the economic crisis into their estimates.
So at this time it may be more useful to look at individual projections, which factor in the expected coronavirus-led recession.
Analysts at Keefe Bruyette & Woods, led by Brian Kleinhanzl, lowered their median earnings estimates on March 31 for “universal banks” by 58% for 2020 and 50% for 2021, to reflect rising unemployment and loan losses, along with very low interest rates. Loan losses during recessions tend to maximize about six months after unemployment peaks, but the 2020 estimates were cut more because the banks will set aside reserves before most of the loans are actually charged-off.
Here are KBW’s updated and previous earnings-per-share estimates for the six largest U.S. banks for 2020 and 2021. KBW also introduced estimates for 2022, “since we believe at that point the impacts of elevated provisioning will be reduced and investors can evaluate bank stocks on post-recession returns,” Kleinhanzl wrote in the March 31 report.
|Bank||Ticker||2020 EPS estimate - March 31||2020 EPS estimate - previous||2021 EPS estimate - March 31||2021 EPS estimate - previous||2022 EPS estimate|
|J.P. Morgan Chase & Co.||/zigman2/quotes/205971034/composite JPM||$4.34||$11.00||$5.42||$11.80||$7.70|
|Bank of America Corp.||/zigman2/quotes/200894270/composite BAC||$1.36||$3.05||$1.59||$3.30||$2.43|
|Citigroup Inc.||/zigman2/quotes/207741460/composite C||$1.86||$8.70||$2.84||$9.70||$6.51|
|Wells Fargo & Co.||/zigman2/quotes/203790192/composite WFC||$0.90||$4.10||$1.90||$4.65||$3.29|
|Goldman Sachs Group Inc.||/zigman2/quotes/209237603/composite GS||$10.65||$24.00||$17.77||$27.05||$22.66|
|Morgan Stanley||/zigman2/quotes/209104354/composite MS||$2.12||$5.45||$3.13||$6.05||$7.70|
You will need to scroll the table to see all the data.
Those estimate cuts are so severe, it’s no wonder that during the first quarter, the KBW Bank Index /zigman2/quotes/210598427/realtime BKX +5.32% fell 43%. The index includes most of the nation’s largest commercial banks. Meanwhile, the KBW Regional Bank Index /zigman2/quotes/210598426/realtime XX:KRX +5.13% fell 41%. Those were far worse than the first-quarter declines investors experienced in the broad market — the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.62% was 20%, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.54% declined 23%.
Investors who went through the financial crisis of 2008 and its long aftermath understandably shy away from holding bank stocks through a recession — especially one with an unemployment rate approaching 10% and possibly heading much higher.
“For JPM, we believe this is an opportunity to upgrade to quality, and we believe that JPM is well-positioned to withstand a recessionary environment and come out of the recession in a better position than most banks, as the company can use the balance sheet to gain market share,” Kleinhanzl wrote.