Big bank profits will highlight the unofficial start of the third quarter earnings season this week, with investors looking for sequentially improving performance, as well as a guide on economic trends heading into the final months of the year.
With the Federal Reserve keeping its cap on dividend and buybacks in place until at least 2021 in order to ensure that lenders have enough capital to absorb a protracted downturn triggered by the coronavirus pandemic, investors will be looking to see how each of the largest U.S. banks will manage both their credit provisions and near-term economic forecasts as they publish third quarter earnings throughout the week.
Under the Fed's restrictions, banks will be limited to paying dividends that are either in line with payouts from last year or equal to an average of earnings for the previous four quarters.
The six biggest U.S. banks -- JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs Morgan Stanley and Wells Fargo -- have booked around $60 billion in loan loss provisions so far this year, including $34.6 billion over the three months ending in June, as they took advantage of accounting changes that allowed them to front-load the economic costs of the pandemic.
Below is a brief snap shot of analysts' expectations for Big Six earnings this week, starting with JPMorgan's third quarter update, which is slated for around 6:45 am Eastern time on Tuesday.
JPMorgan Chase & Co. (JPM) - Get JPMorgan Chase & Co. (JPM) Report: The country's biggest bank is expected to report a 17.2% decline in core earnings, to $2.22 per share, on revenues of around $20.13 billion.
JPMorgan isn't expected to add to its loan loss provisions in the third quarter, following a front-loaded $10.5 billion increase in the three months ending in June, and investors are likely instead to key on CEO Jamie Dimon's macro economic projections and his usually detailed take on current conditions on both financial markets and broader growth prospects.
Citigroup (C) - Get Citigroup Inc. Report: Citgroup, which recently named Jane Fraser as successor to outgoing CEO Michael Corbat, is expected to post third quarter earnings of 91 cents per share, a 54.2% decline from the same period last year.
Citigroup is, to date, the only Big Six bank that plans to increase credit reserves this quarter, but noted the total would be 'meaningfully lower' than the $7.69 billion in booked in the previous three month period.
Bank of America (BAC) - Get Bank of America Corp Report: Bullish comments last month from CEO Brian Moynihan, who suggested trading revenues could rise between 5% and 10% from last year in both fixed income and equity trading have boosted Street projections for Bank of America, which is expected report core earnings of 60 cents on revenues of $20.86 billion Wednesday.
Wells Fargo (WFC) - Get Wells Fargo & Company Report: Still operating under a $1.95 trillion asset cap put in place by the Fed in 2018 following the bank's 'fake account' scandal, Charles Scharf's first year at Wells Fargo has been a difficult one.
Near zero interest rates have compressed margins, the asset cap is preventing the deployment of its liquidity to the real economy, putting renewed pressure on cost management and deposit retention. Its notice of nearly 1,000 accounts in bankruptcy proceedings last month -- and its provision of support for them -- also highlighted the underlying weakness in consumer finances that hits the bank particularly hard.
Analysts are looking for core earnings of 34 cents and a modest increase in loan loss reserves.
Goldman Sachs Group Inc. (GS) - Get Goldman Sachs Group, Inc. (GS) Report: Much like Bank of America and JPMorgan, investor focus on Goldman earnings will center on capital markets revenues, which are expected to rise by around 30% from the same period last year.
Litigation expenses are also a key line-item for the bank following its settlement with the Malaysian government over the 1 MDB sovereign wealth fund scandal in July, while loan loss provisions are likely to come in well south of the $1.59 billion booked over the three months ending in July.
Earnings expectations are pegged at $6.22 per share, according to rough Street forecasts.
Morgan Stanley (MS) - Get Morgan Stanley (MS) Report: Last week's $7 billion play for asset manager Eaton Vance Corp. (EV) - Get Eaton Vance Corp. Report provided yet another indication of the bank's direction under CEO James Gorman, who has steered the bank for more than a decade.
Higher client balances in wealth management, as well as increased revenues in capital markets trading, should provide a solid earnings boost, especially if credit provision remain muted following the $239 million the bank took over the second quarter. The Street is looking for earnings of $1.32 per share and the maintaining of the bank's 35 cents per share dividend into the end of the year.