The largest banks in the country will report theirs Merits for the third quarter of this week. These results will likely indicate how the financial industry has weathered some of the greatest headwinds in the country’s history: a global pandemic, an exacerbated climate crisis, accelerated digital transformation, competition with Fintechs around the globe and the impending danger of a real estate crisis.
The central theses
- Major US banks are entering profitable season this week and facing numerous challenges, including the pandemic and a potential housing crisis.
- Analysts expect major banks’ profits to decline year over year, but many lenders are taking proactive steps.
- Banks are also facing increased government scrutiny and pressure to adopt new technologies and increase diversity.
While some analysts expect it Earnings per share (EPS) In order for the largest US banks to decline year-on-year, many lenders have proactively taken aggressive measures and made strategic decisions despite a challenging operating environment. KBW forecasts earnings per share of 16% for the nine largest US banks compared to the same period last year Market observation. The SPDR S & P Bank ETF (CFU) has decreased by 30% this year.
“Banks have some of the highest levels of COVID beta on the market “Mike Mayo, Bank Analyst at Wells Fargo & Company (WFC), said Barron in terms of the banks’ commitment and sensitivity to developments in the pandemic. “The exact time is difficult to tell, but when you can get one Sector rotation in the banks they could rise by 10% to 20% in days. ”
There are signs of problems in the real estate market across the country, particularly in areas particularly vulnerable to climate change and a lack of government-sponsored pandemic aid. Without additional federal measures, we are likely to see further evictions rise and deteriorate Real estate crisis. Princeton University’s Eviction Lab, which is tracking these in 17 U.S. cities, recorded 58,612 evictions on October 3. Researchers believe “millions of tenants owe significant rentbacks” and expect a “displacement and eviction crisis to follow the public health crisis.” ”
So far, the four largest lenders have provided reserves of $ 10 billion Bloomberg analyst estimatesThis suggests that the worst may still be ahead. This week’s earnings reports will provide more detailed information on what role the big banks are likely to play in the next chapter of the US health and housing crisis, and when some of these reserves could be deployed, which would have an impact Net income.
Meanwhile, third-quarter bank revenues are expected to continue to decline in the third quarter as the Federal Reserve cut its lending rate to zero in March. Citigroup Inc. (C.) and JPMorgan Chase & Co. (JPM) their third quarter earnings will be at Bank of America Corporation (BAC), The PNC Financial Services Group, Inc. (PNC), The Goldman Sachs Group, Inc. (GS) and Wells Fargo will publish results on Wednesday, October 14th.
Bank reserves are the minimum cash that financial institutions must hold in order to meet central bank requirements. The bank cannot lend the money but has to keep it in the on-site vault or with the central bank to meet a large and unexpected demand for withdrawals.
It’s no secret that many US financial institutions have lagged behind Asia and many countries in Europe in adopting digital technologies. This year this could change. This week, more banks are likely to announce their advances in digital transformation and online customer loyalty.
To drive digital innovation, Bank of America received 184 patents in the first half of this year. This corresponds to an increase of 20% compared to the previous year Corporate statement. The bank has filed a total of 415 patents, which is also a record for the lender. These patents include “money transfer, bill payments, preprocessing ATM transactions, validation of checks using augmented reality, and cardless and deviceless authentication technology.”
Increase in regulatory control
With many banks likely to face more pressure from the ongoing pandemic and tight economy, there is also tighter regulatory scrutiny in the past quarter. The $ 1 billion fine will be particularly noteworthy for JPMorgan. JPMorgan together with United Parcel Service, Inc. (UPS) and TD Ameritrade are also facing increasing legal scrutiny and complain on alleged patent infringements in the use of app technology as mobile banking has increased.
This economic downturn was varied in a number of ways, including closer government scrutiny taking into account various government agencies and reports of activity that has largely flown under the radar in the recent past. ONE BuzzFeed report found that Western banks have “moved trillions of dollars in suspicious transactions to enrich themselves and their shareholders while making the work of terrorists, kleptocrats and drug queens easier”.
The investigation of the FinCEN files revealed that banks such as JPMorgan Chase, HSBC Holdings plc (even after criminal prosecution or fined for financial misconduct)HSBC), Standard Chartered plc (SCBFF), Deutsche Bank AG (DB) and the Bank of New York Mellon Corporation (BN) continue to move money for suspected criminals. It is still unclear what these investigations will mean for the big banks beyond the fines and whether further regulatory measures will be introduced after the 2020 presidential election.
Intensify climate change
While the United States is slated to step out of the 2015 Paris Agreement on November 4th, and the broader national climate agenda is still in the air, many banks are taking proactive steps this year. JPMorgan Chase, the largest US bank, has announced Climate goalswho will announce it next year. These climate goals, which should be achieved by 2030, start with the energy industry and, according to the lender, apply to every industry in the bank’s portfolio.
“Climate change is a critical issue of our time. The goals set in the Paris Agreement are laudable and ambitious, but the world is not on track to achieve them.” said Daniel Pinto, Co-President of JPMorgan Chase who also serves as CEO of the Corporate & Investment Bank. “While the world still has a long way to go, at JPMorgan Chase we want to do more. That means working with customers, policy makers and advocates to transform our economy and make the Paris goals a reality.”
The health crisis and global pandemic have exposed many disparities in the US economy. Some of the largest US lenders have launched programs to address diversity and the persistent wealth gap.
JPMorgan Chase made one $ 30 billion commitment “Closing America’s Racial Wealth Gap” to Address Diversity Among Its Money Managers. “Systemic racism is a tragic part of American history,” said Jamie Dimon, CEO of JPMorgan.
Other banks have also taken steps. Bank of America $ 1 billion pledged over four years to move forward and announced investments in diversity. “This summer brought a new directness, a new openness and the reluctance to not be so polite about the discussion” about diversity, after Cathy Bessant, Chief Operations and Technology Officer at Bank of America.
A milestone for the banking industry, Citigroup appointed Jane Fraser As CEO in September, she was the first female CEO of a major bank. Nevertheless, the industry as a whole still has a long way to go.
“I’ve seen progress in our country, in banking, and in federal services. But I can still see it few people who look like me in boardrooms, in senior positions among federal agencies, and among international heads of banking supervision, “wrote Grovetta N. Gardineer, Senior Deputy Comptroller, Banking Regulatory Policy, Office of the Currency Auditor in a column for American bankers. “In these situations I am still among the few women and almost always the only woman with color.”
Consumer Credit Losses and Profitability
As banks respond to the pandemic and the social justice movement it sparked, more of these actions are likely to affect theirs Balance sheets.
“The banks have been flooded with deposits and have nowhere to put,” he said Brian Foran, Analyst at Autonomous Research. “Healthy companies don’t want to borrow because the future is still uncertain. Struggling companies want to borrow to stay afloat, but as a bank, it’s difficult to lend to these sectors.”
This week we will see if banks will continue their cautious stance on what impact the current environment has had on them Net interest incomeand how they could prepare for more turbulent times.