US Banks: The Calm Before The Storm?

US Banks: The Calm Before The Storm?

over 3 years ago3 mins

Mentioned in story

The biggest US banks’ third-quarter earnings calmed concerns about loan loss provisions – and unleashed some encouraging news from their trading divisions.

🕰 Recap

  • On Tuesday, JPMorgan Chase and Citigroup announced stronger-than-expected earnings
  • Goldman Sachs followed suit on Wednesday, although Bank of America’s results were more mixed
  • And on Thursday, Morgan Stanley’s third-quarter update beat investors’ expectations

✍️ Connecting The Dots

On the face of it, American banks have had a good few months: they by and large made more profit than analysts had predicted. Still, the firms had their trading arms to thank for a lot of that lucre. Following a volatile second quarter for markets, investors continued to make extensive adjustments to their portfolios – and the traders facilitating those changes raked in commensurate levels of commission. In fact, major US banks are on track for their first year of $100 billion collective trading revenue since 2010, having clocked around $80 million in 2020 to date.

Earlier this year, banks were setting aside huge sums of money to cover potential defaults from borrowers. Those “provisions” totaled $35 billion in the second quarter; in the third, however, US banks squirreled away a lot less – just half the amount investors thought they would overall. Coupled with comments from Citigroup – the world’s largest credit card provider – to the effect that worries about writing off loans had “stabilized”, you’d be forgiven for thinking things were starting to look up for the economy…

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🥡 Takeaways

It’s tempting to think US banks’ earnings are past the worst of the pandemic, but investors haven’t been getting ahead of themselves. At the start of the week, the banks’ share prices were down some 30% on average this year – and that position was largely unchanged by Friday, despite American stocks rising slightly overall. This might be due to the technicalities of how provisions are calculated: it varies slightly from bank to bank, muddying the meaningfulness of, say, lower-than-expected reserves at Bank of America and keeping investors from getting too excited. And given provision levels typically reflect the likelihood of losses in the close future, some think there’ll be sharp revisions to come as a tidal wave of bankruptcies – put off for a time by central bank and government support – finally hits home.

Several analysts have long argued that cheap-looking stocks like banks’ – where share prices reflect lower-than-average multiples of book value and predicted earnings per share – are due a resurgence. If and when banks’ earnings look fit enough for investors to increase profit forecasts across next year and beyond, their valuation multiples will look even cheaper. Investors might then feel they’ve got no choice but to buy in – and that demand could give bank stocks a big boost.

🎯 Also On Our Radar

Apple unveiled its newest iPhones last week, accompanied by positive updates from some of the world’s biggest microchip makers. Chief among these was Friday’s announcement from market leader Taiwan Semiconductor: the company raised its annual earnings estimate for the second time this year. Not only did it have a new wave of 5G phones to thank, but there was high demand from China’s Huawei ahead of its September ban on buying US technology – including that used in Taiwan Semi’s chips.

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