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Bank Earnings Season: What to expect

Yahoo Finance's Emily McCormick reports on what do expect as the big banks begin reporting Q3 earnings next week.

Video Transcript

JULIE HYMAN: Let's move on and look to next week and talk about bank earnings. Because we've got a flurry of companies reporting on Tuesday-- JP Morgan and Citigroup; on Wednesday, Bank of America and Wells Fargo. Our Emily McCormick is looking at all of this. What are some of the big themes that we can be expecting in these numbers?

EMILY MCCORMICK: Well, Julie, as we look ahead to third quarter earnings season, kicking off as usual with those big banks, the Street is expecting to see an extension of the trends that we really saw in the second quarter. And those include net interest income being pressured by the low interest rate environment that we're in. Remember that the Federal Reserve, of course, has recently signaled that rates would likely remain near zero until at least 2023. So that is going to be weighing on bank profitability for as long as that is the case.

Now, it's also going to be important to watch whether these banks continue to build their stockpiles to brace for further consumer loan losses. Now, that's something that occurred heavily in the first half of the year and also weighed on bank profitability. We saw in the second quarter that JPMorgan Chase, Citigroup, and Wells Fargo-- which each have large retail banking businesses-- collectively setting aside $28 billion in loan provisions to cover losses in anticipation that clients might default on their loans during the pandemic. So it's possible that for some of these banks, those reserves might actually continue to grow, albeit likely at a slower pace than we saw in the first half of the year so far.

Now, taking a look at the positives that the Street is expecting in next week's results, we're also potentially going to be seeing an extension in strength in trading revenue from some of the big banks like JP Morgan, Goldman Sachs, and Morgan Stanley. Taking a look at those second quarter results, we have JPMorgan Chase trading revenues up 79% and up by 93% at Goldman Sachs. And that's when both equity and fixed income trading had been on the rise because of the rise that we saw in the stock market off of those March 23rd lows. And of course, we did have that stock market continuing to run up through the end of the summer, so that's something to watch as well.

And finally, want to note that on some of these major shops, likely to see investment banking revenues still a strong point as well, since we did have that influx of IPOs and SPACs, so special purpose acquisition company deals, occurring throughout the past several months. So those are some of the things the Street will be watching next week, Julie and Adam.

ADAM SHAPIRO: Emily, we had Mike Mayo on yesterday, and he was specifically talking about Citi. And I'm curious, are there other analysts out there who are calling, perhaps Jane Frazier, to take over sooner than February? Are you hearing or seeing any of that out there?

EMILY MCCORMICK: That's an interesting point, Adam. And I think just taking a look at a number of these companies like Citigroup, that has its own sort of regulatory overhang-- I mean, we of course, had that BuzzFeed investigative story that came out over the past couple of weeks and I believe during the third quarter as well that had also been an overhang on some of these banks. I think that's something to potentially watch, as well, as we head into these earnings. We've had quite a bit of turnover, of course, just in the C-suite; executive shakeups at a lot of these big banks, really trying to rehabilitate these companies to where they had been. They've been, really many of them, underperforming, especially Citigroup, even since the Great Recession. So I think that's something to watch, as well, from the analyst side of things and what executives have to say on these earnings calls. Adam and Julie.

JULIE HYMAN: Emily, thanks so much. Our Emily McCormick there. Apprciate it.