Wall Street Eyes Banks’ Worsening Outlooks, ‘Blow-Out’ Markets

Shares of JPMorgan Chase & Co. were little changed, Citigroup Inc. slipped and Wells Fargo & Co. sank as analysts assessed the banks’ better-than-expected second-quarter capital markets results and cautious views as the coronavirus pandemic rippled through the global economy.

Chief executives at all three lenders warned that outlooks had deteriorated since last quarter, while Wells Fargo slashed its dividend more than analysts anticipated.

JPMorgan spoke of a protracted downturn and said government stimulus was making it harder to gauge the economic damage from the pandemic, with Chief Executive Officer Jamie Dimon saying, “this is not a normal recession.” Dimon also predicted trading results would eventually revert to historic norms.

Wall Street Eyes Banks’ Worsening Outlooks, ‘Blow-Out’ Markets

JPMorgan erased most of a 2.4% gain Tuesday in New York after fixed-income, currencies and commodities sales (FICC) and trading revenue of $7.34 billion topped an average estimate of $5.74 billion. Record markets revenue, up 79%, and investment banking fees, up 54%, “more than offset interest-rate headwinds and reduced consumer activity,” Dimon said in the bank’s statement. He also expressed confidence in the bank’s current dividend.

Read more in our preview: JPMorgan Likely Earnings Winner Amid Lure of Capital Markets

Citigroup fell as much as 3%. The bank’s FICC sales and trading revenue of $5.6 billion exceeded the average projection of $4.59 billion, echoing JPMorgan’s earlier beat, though not by as much. Cost of credit of $7.9 billion reflected an allowance for credit loss builds due to a “deterioration in Citi’s macroeconomic outlook since the end of the first quarter,” along with corporate loan downgrades, the bank said in a statement. The added reserves also included a “qualitative management adjustment” for more “stress and/or a somewhat slower economic recovery.”

Wells Fargo tumbled as much as 8.2%, to the lowest since May 15, after reporting its first quarterly loss since 2008 and cutting its dividend by more than analysts had expected, to 10 cents a share. Wells’ second-quarter net loss of $2.4 billion included an $8.4 billion increase in its credit loss reserve, driven by “current and forecasted economic conditions.”

“We are extremely disappointed in both our second-quarter results and our intent to reduce our dividend,” CEO Charlie Scharf said in the bank’s statement. “Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter.”

The KBW Bank Index, which shed as much as 2.7% Tuesday, has now tumbled 36% so far this year amid pandemic-fueled economic woes and low interest rates, underperforming the S&P 500, which has fallen 2%.

Here’s a sample of the latest analyst commentary:

Bloomberg Intelligence, Alison Williams

Results were “as expected but magnified, with JPMorgan and Citi’s strong trading helping to fuel bigger loss provisions, which provides a cushion for the second half,” Williams said. “Wells Fargo’s substantially larger build did not share the same offset,” she added.

Wells Fargo’s dividend cut to the “low end of bearish expectations should remove uncertainty around potential future reductions, while potentially helping to improve its case as a conservative risk manager, as it aims to remove Fed constraints.”

Vital Knowledge, Adam Crisafulli

JPMorgan’s “blow-out investment banking performance,” with FICC revenue up 120% from the prior year, was offset by a “huge provision number and ongoing reserve builds,” Crisafulli wrote.

The tone on JPMorgan’s conference call was “neutral-to-positive for the stock in that reserve builds might have peaked,” he said. At the same time, a remark about flattening consumer sales growth across the country was a “negative macro indication.”

Wolfe Research, Steven Chubak

“JPMorgan took advantage of their strong trading gains by plowing a significant portion back into credit reserves, positioning the firm well for future quarters, while also building substantial capital,” Chubak wrote. While the trading momentum may not be sustainable, investors will probably “react favorably” to the strong beat and reaffirmation of net interest income and expense guidance.

UBS, Saul Martinez

Citigroup’s earnings-per-share was roughly in line with UBS’s estimate, as “loan loss provisions were materially higher than expected on elevated reserve builds, but sales and trading income beat our forecasts,” Martinez wrote. The result’s “most noteworthy” areas were: $5.6 billion of loan loss reserves; sales and trading and investment banking that boosted revenue; controlled expenses and a 12% year-over-year decline in Asia and Latam consumer banking revenue.

“Overall, operating trends seem mixed to us, with considerable revenue pressure in consumer businesses, but expense discipline and strong results in markets oriented businesses.”

Credit Suisse, Susan Roth Katzke

Wells Fargo‘s earnings-per-share miss came from lower-than-expected revenue and higher-than-anticipated expenses and provision, Katzke wrote. “The question is how close this quarter gets to a bottom in earnings; it’s hard to surmise in an uncertain macro environment.”

KBW, Sanjay Sakhrani

Credit card volume trends at JPMorgan, Wells Fargo and Citigroup were consistent with expectations, with “some greenshoots if one looked at intra-quarter trends,” Sakhrani wrote.

“While T&E and restaurant volumes remain extremely weak, there has been notable improvement,” with volumes down about 50% exiting June versus a drop of 80% to 90% in early April, he said. Sakhrani will watch US Bancorp results Wednesday for “greater color” around corporate volumes, which may offer insight into what to expect from American Express.

©2020 Bloomberg L.P.

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