July 10, 2020
Credit pressure
The largest U.S. banks entered second-quarter earnings with credit losses expected to outweigh gains from trading, underwriting, and mortgage activity. Analysts expected the period to be the weakest for bank earnings since the financial crisis, as unemployment pressured consumer repayment capacity and reduced new borrowing.
Large banks were expected to reserve more for loan losses than they did in the first quarter. Combined earnings at the four biggest U.S. banks were projected to be the lowest in more than a decade. Wells Fargo was especially exposed because it was already dealing with prior scandals before the pandemic. Its second-quarter results were expected to be the weakest since at least the financial crisis.
Wells Fargo Chief Financial Officer John Shrewsberry had said the bank expected to set aside more for bad loans than the $4 billion reserved in the prior quarter. Barclays analysts expected industry loan-loss provisions to reach their highest levels since the financial crisis.
Markets businesses
Trading and underwriting helped offset some of the credit pressure. Combined stock- and bond-trading revenue at the five biggest banks was expected to rise 31% from the prior-year quarter. JPMorgan Chase was projected to post the largest increase, and co-President Daniel Pinto said in June that trading revenue was expected to rise about 50% from a year earlier.
Debt capital markets were also active as companies raised liquidity during the crisis. Citigroup's Richard Zogheb, global head of debt capital markets, said he expected record volume for the period. U.S. investment-grade corporate bond issuance more than doubled year over year to $757.7 billion, while high-yield issuance rose 61% to $130.1 billion.
Mortgage support
Mortgage activity added another source of support. Low rates pushed homeowners to refinance, and U.S. refinancing activity almost doubled from the prior year. The average 30-year mortgage rate had fallen to 3.03%.
Mortgage profitability was also elevated. The spread between what lenders charged borrowers and what they could receive by selling the loans reached its widest level since the financial crisis in April. A profitability measure maintained by the Urban Institute also reached a record high that month.
The quarter was expected to show a split within bank earnings. Consumer credit and loan-loss reserves were the main drag, while trading, underwriting, and mortgage activity provided partial offsets. The market focus was whether reserve builds would keep rising faster than those stronger businesses could compensate.