What to Watch for When U.S. Banks Deliver Look at Virus Impact

(Bloomberg) -- Investors in U.S. banks get their first look this week at how the coronavirus pandemic will impact the biggest firms’ loan-loss provisions, trading revenue and guidance for full-year earnings.

JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp. and Citigroup Inc. will report earnings this week, as will investment banks Goldman Sachs Group Inc. and Morgan Stanley. Smaller regional lenders follow next week. Shareholders will be paying close attention to how the companies are managing their balance sheets, given the pain Covid-19 is causing for households, businesses, markets and the overall economy.

At banks’ consumer units, the amount of provisions set aside for credit losses will give a sense of how severely the economic turmoil will impact individuals. For some firms, one bright spot could be an increase in trading revenue from high volumes due to market volatility. For others, that could be overshadowed by markdowns of debt they held as spreads widened.

Any insight into banks’ expectations for the remaining quarters of 2020 will also be watched closely, along with any signs that U.S. banks might follow their European counterparts in cutting dividend payments.

Here are five things investors and strategists will be looking at:

Loss Provisions

With people staying at home, spending less and, in some cases, losing their jobs, banks’ credit-card and consumer-lending businesses are expected to take a hit. First-quarter results from the nation’s four largest consumer banks will probably show an overall drop in loans and a jump in bad debt, leading to an increase in credit-loss provisions.

Read more: Banks’ reliance on consumer units upended

Until the beginning of this year, banks had come to rely on their consumer units as a steady source of profit, but high rates of unemployment will make it hard for many people to keep up with their bills. Top lenders may have to set aside as much as $164 billion in loss provisions this year, according to analysts’ estimates.

What to Watch for When U.S. Banks Deliver Look at Virus Impact

At the same time, banks are grappling with a new accounting rule that requires them to recognize loan losses more quickly. The rule, known as CECL, means that buybacks for the rest of 2020 will be nearly impossible, given the capital requirements needed to support potential loan losses.

The recently passed federal coronavirus relief legislation allows banks to delay CECL implementation until the end of 2020, but most banks are expected to proceed with it this quarter, according to a report Monday from Fitch Ratings Inc.

The adoption of CECL “will magnify the impact of the sharp economic contraction as a result of the coronavirus pandemic on U.S. lenders’ 1Q20 financial results and exacerbate an already complex outlook for lenders’ credit losses,” Fitch said in the report.

Trading Revenues

When it comes to trading, there will likely be winners and losers this quarter, with some banks benefiting from high equity volumes and others stuck with high-yield bonds and leveraged loans.

What to Watch for When U.S. Banks Deliver Look at Virus Impact

Another challenge is that many traders have been working from home, and a disjointed work environment can impact information flow and cause divergences in decision-making, according to UBS Group AG analyst Brennan Hawken.

Goldman Investing

Unlike its peers, Goldman Sachs has a large investment portfolio across its asset-management and merchant-banking business. While that’s helped drive some of the firm’s most profitable results, the company is also particularly exposed to market gyrations.

The firm’s annual 10-K filing estimates that a $4.2 billion reduction in net revenue would result from a 10% decline across the value of its equity and debt positions. Goldman has a $22 billion equity portfolio, with about 90% of it in private equity.

What to Watch for When U.S. Banks Deliver Look at Virus Impact

But it won’t be all doom and gloom in that unit. In February, the firm announced the largest-ever private real estate transaction in the U.K., the sale of a student-housing business to Blackstone Group Inc. Goldman is expected to record a handsome profit from that deal when it’s completed.

2020 Guidance

Any indication of expected results for the remaining three quarters of 2020 will be of interest to nervous investors eager to understand the longer-term impacts of the pandemic.

Changes to annual forecasts will provide insight into how banks expect the economy to perform for the rest of 2020 as well as the effect of record-low interest rates. Updates to loan-loss provision forecasts for the second quarter are also of interest because stay-at-home orders are still in effect in many states through April and into May and potentially longer.


In Europe, banks including UBS Group AG, Credit Suisse Group AG and HSBC Holdings Plc are taking capital-preserving measures including suspending or halting dividends, as well as making changes to management bonuses.

The biggest U.S. banks have already halted share buybacks to allow them to boost lending, and dividends make up a much smaller part of capital returns to investors than buybacks, according to Goldman Sachs Chief Executive Officer David Solomon.

U.S. bank CEOs have largely dismissed the idea of halting dividends, and Federal Reserve Chairman Jerome Powell said last week he sees no reason why the country’s lenders need to suspend dividends at this time. That said, investors will still be looking for any indication of additional measures being considered by the banks.

©2020 Bloomberg L.P.

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