Banks Earnings Plunge

J.P. Morgan NYSE: JPM kicked off the start of earnings season with their Q1 release on Tuesday this week. For the bulls, they were hoping for a strong showing to bolster their belief in the broader market rally and to confirm that the coronavirus pandemic didn’t do as much damage as feared. Unfortunately, they were disappointed. Analysts had expected earnings per share of $1.84 and JPM couldn’t muster half of that; their EPS for Q1 came in at $0.78. Revenue also missed by more than $1 billion and contracted 3% compared to the same quarter last year.

On top of that, facing a wave of widespread defaults on their loans, management made the critical decision to shift almost $7 billion into the company’s credit reserves.

Unsurprisingly, shares are down more than 10% since the release and have already given up half of the 35% rally they staged off March’s lows into this week’s release. The recent selloff was a kick in the teeth for JPM investors and this release is adding to their woes. Having traded sideways for much from 2017 through 2019, they’d finally started to break out to new highs at the start of this year. By the time they hit March’s lows, they’d given up a staggering 45% of their value in just 3 months and by the looks of Q1 numbers, it might be a while before they’re undoing the damage.

Falling Knives

Their peers across the banking space were all shuddering with the release and investors were quick to start exiting positions, helping the banking sector to be one of the worst-performing industries this week. Many on Wall Street had surely picked up shares at what felt like bargain prices in the past few weeks but might not be feeling that they caught a falling knife.

Also reporting on Tuesday was Wells Fargo NYSE: WFC and JPM might have been thanking their lucky stars they weren’t hurt as much as them. WFC’s revenue came in light by over $1.5 billion and dropped a full 18% compared to the same quarter last year. Management also shifted funds to bolster their credit reserves for the coming weeks and months. Performance-wise, WFC’s stock has performed the worst out of the major names, a dubious tag for investors to contend with.

Bank of America NYSE: BAC was out with its Q1 earnings on Wednesday and posted a 45% drop in first quarter profit. They managed to marginally beat analyst expectations for their revenue, which still contracted year on year but missed on earnings per share. They cited a factor that is likely to be keeping other bank executives up at night, the Fed’s lowering of interest rates. This is one of the strongest headwinds a bank can face as it wipes away their profit margins on net interest income, which BAC’s CFO, Paul Donofrio, said is one of their main sources of income.

Along with BAC, Goldman Sachs NYSE: GS reported their numbers on Wednesday and missed expectations. Their provisions for credit losses more than quadrupled compared to the same quarter in 2019 as they hunker down and batten the hatches. This morning, Morgan Stanley NYSE: MS joined its peers with a hefty miss on topline and bottom-line numbers, with revenue falling almost 8% year on year.

Silver Linings

While these headline numbers make for grim reading, the banking bulls will focus on the performance of the various trading divisions in the last quarter. JPM’s division saw revenue jump 32% to a record $7.2 billion, bond trading, in particular, came in 25% higher than analysts expected. BAC also saw good performance in their trading division and profit increased by 33%, helped no doubt in a large part by all the market volatility of recent weeks. GS’ net revenue from consumer and wealth management operations was up 22% year on year.

However, while these are certainly bright spots on a very dark cloud, investors getting involved should realize that it will likely be months before the full damage to the banking sector is realized. They will have to contend with dividend cuts and pauses in the meantime and a wave of defaults that has yet to hit but is expected to be huge in scale.