Banks Exceeding Expectations in the Third Quarter?
Banks are set to report their third quarter earnings starting this week. Low interest rates and contingency plans for defaults have affected their bottom lines in the second quarter. What has happened in the third…?
Earlier this year, we saw second-quarter results beat expectations in a multitude of sectors, where a record 84% of companies in the S&P 500 reported positive results for their earnings per share. This led many analysts to revise their estimates to reflect their heightened expectations.
However, as banks begin to report this week, such positive expectations might not be translated. Financials have been one of the worst-performing sectors vs the S&P 500. Near-zero interest rates, and its effect on bank’s net interest income, suggest clear threats to the banks’ profitability. Furthermore, it does not seem like the rates will increase anytime soon.
Additionally, banks set aside billions of dollars in the first half of the year in case their customers defaulted on their repayments due to the economic crisis, totalling around $115 billion according to S&P Global ratings. These not only cut banks’ bottom lines but also served as indicators they were anticipating customers would endure a significant financial hit due to the pandemic. Predominantly, across the banks that are set to release later this week, JP Morgan Chase, Citigroup, and Wells Fargo alone, credit loss provisions for the second quarter were around $28 billion.
Time will tell how the banks perform against these uncertain times and how well they protect themselves but also consumers in these unexpected times.
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
