It's earnings reporting season with many of the bigger banks releasing earnings and commentary this week and next. The covid-19 pandemic introduced surprise to 2020's earnings reports with significant increases in reserves for credit losses leading to losses at some banks.
The Economist reports on several factors that make future earnings uncertain in an article titled '
Feeling the pulse -- American banks’ earnings will gauge customers’ financial health'. They note that while reserves have increased actual write-offs have been low due mainly to government stimulus. The Federal Reserves efforts to spur the economy by adding liquidity and low interest rates also has helped.
Charge-offs—ie, write-offs of loans in default—at the four biggest lenders rose by 22% year on year in the second quarter, but still amounted to just $4.9bn. The same was true of delinquent loans (those more than 30 days overdue) and charge-offs industry-wide, which hardly ticked up in the second quarter.
-- The Economist
They note that future results will be impacted by a range of factors. One is the recovery of the economy tied to how quickly states are able to open up. More revenues will allow borrowers to repay loans. A second is what additional federal stimulus is doled out. Much of the earlier stimulus such as the PPP loans and added unemployment benefits have ceased to protect small businesses and workers. It seems that talks of more stimulus are on today, off tomorrow. Clearly more stimulus will protect both banks and their borrowers at least for a while.
The
Wall Street Journal is not expecting significant increases in reserves in Q3 as reported in '
Banks Have a Chance to Come Up for Air'. One exception might be banks with large commercial real estate portfolios that are threatened by closing businesses and the shift to work from home. The biggest banks likely were helped by strong capital markets. Increases in deposit balances likely helped net interest earnings as well even through loan volumes declined. Very low rates paid on deposits still allow banks to earn positive margins investing in debt securities.
While banks' prospects seem more positive than in the prior 2 quarters some questions remain open. Lenders can be positively impacted by further stimulus and countries gaining control of covid-19 that would allow economies to fully reopen. But if those efforts fail it's hard to know how things will look at the end of the year.
