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Banks Issue Mixed Views for Q2, Reserves Likely to Rise

Priti Dhanuka

On Wednesday, at the 2020 Morgan Stanley U.S. Financials Virtual Conference, top executives from some of the major banks — Wells Fargo WFC, JPMorgan JPM, Citigroup C, Morgan Stanley MS and U.S. Bancorp USB — issued mixed guidance for the June-end quarter as well as the second half of the year.

At the conference, John Shrewsberry — chief financial officer (CFO) at Wells Fargo — stated that interest income for this year will decline more than 11% year over year. Moreover, loan loss reserve in the current quarter is expected to exceed the first quarter, in which results were marred by the coronavirus mayhem.

At the same conference, JPMorgan’s chief operating officer — Gordon Smith — noted that retail banking might be challenging due to interest rates in the second quarter, though growing deposits will likely be a savior.

Meanwhile, commenting on the outlook, Citigroup CFO Mark Mason said loan balances and net interest revenues are expected to fall in the June-end quarter, while credit card spending has also gone down in May. Overall, revenues are likely to be slightly down in the current quarter. Expenses might fall slightly during this period.

On the institutional side, Mason expects total trading revenues across both fixed income and equities to be up at similar levels as in the prior quarter (up 40% year over year) on a percentage basis. Notably, revenues are anticipated to be up mostly on fixed income. Investment banking results are also expected to be up on a year-over year basis.

On the contrary, higher level of reserves build is expected in the second quarter as compared with the first.

Among other banks, per Morgan Stanley chief executive officer (CEO) James Gorman, the bank is likely to build less for potential loan losses in the current quarter compared with the March-end quarter. "The worst is behind us," Gorman noted regarding the bank's reserve build.

Per Gorman, Morgan Stanley is likely to cover its dividend "very easily" this year.

Apart from these, CEO Andy Cecere of U.S. Bancorp predicted at the Morgan Stanley conference that the second-quarter loan loss reserves will be higher than the $993 million recorded in the first quarter. Therefore, he views higher reserve build for this quarter.

Also, the bank expects net interest margin to fall by shrink 30 basis points and net interest income to be flat-to-slightly-lower.

Late last month, top executives of most of these major banks also attended other virtual conferences and stated their views on the April-June quarter and thereafter.

Conclusion

Banks are skeptical about the second quarter amid global market turmoil due to the coronavirus crisis. Nevertheless, as the Fed is supporting the economy with all its might and banks have ample liquidity, the U.S. economy is likely to come out of the woods as early as the second half of the year.

All the above-mentioned stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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JPMorgan Chase Co. (JPM) : Free Stock Analysis Report
 
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