JPMorgan, Wells Fargo, Citigroup, Nike and Oracle are part of Zacks Earnings Preview

For Immediate Release

Chicago, IL – July 13,2020 – releases the list of companies likely to issue earnings surprises. This week’s list includes JPMorgan JPM, Wells Fargo WFC, Citigroup C, Nike NKE and Oracle ORCL.

What Will Q2 Bank Earnings Reveal?

The large money-center banks that will kick-off the 2020 Q2 earnings season for the sector this week have been hit hard in the ongoing pandemic-driven economic downturn.

Stocks in the Zacks Major Banks industry — including JPMorganWells FargoCitigroup and others — on deck to report results this week have only modestly recovered from their March 23rd lows, and lag the broader market in a major way. Even within this beleaguered space, Wells Fargo is in a league of its own, with the stock losing further ground for company-specific reasons.

This underperformance is not surprising, given the group’s exposure to what is expected to be a sharp downturn in economic activities in the current period. Banking is after all a cyclical business, with the demand for credit and investment banking services strongly correlated with GDP growth. Low interest rates, which the Fed has reiterated will remain in place for an extended period, weigh on margins and net interest income.

The group also suffers in a downturn from deterioration in credit conditions that has a direct bearing on the quality of its assets (loan portfolios) as borrowers struggle to service their obligations.

Offsetting these headwinds are the beneficial effects of PPP loans that have likely expanded balance sheets, although lower margins on these loans will offer limited bottom-line support. Net interest margins across the space will be below the preceding quarter’s level.

We are unlikely to get the full picture on asset-quality measures like allowance for credit losses (money set aside for problem loans) given deferrals/forbearance. But we expect banks to announce bigger provisions than they did in Q1. Banks retain a fair amount of discretion in this area, but the recent Fed decision to use trailing four quarter earnings as the basis for bank dividends will likely serve as a restraint.

Beyond traditional banking, the outlook for capital markets and investment banking remains favorable, with Q2 trading volumes notably above the year-earlier levels. On the advisory side, while M&A volumes were soft in Q2, there was plenty of activity on the equity and debt issuance side.

With respect to banks’ Q2 earnings, and also with companies in other industries/sectors, the important elements wouldn’t be so much the numbers for the June quarter, but rather the evolving outlook for the current (Q320) and following quarter. To that end, it is hard to envision any management team having the visibility to offer useful guidance given the ongoing upsurge in coronavirus infection rates in large segments of the country.

The set-up for bank earnings is tough, with margins under renewed pressure because of Fed policy. We will see the full extent of the Fed’s emergency rate cut in Q2 numbers, with many analysts modeling net-interest margins that are 20 to 25 basis points below 2020 Q1 levels. Loan portfolios likely expanded in Q2, thanks to the PPP business.

All in all, the group is in excellent financial shape in terms of capital cushions. But questions about the group’s dividends remain.

Q2 Earnings Numbers Will Look Ugly

Total Q2 earnings for the Zacks Major Banks industry, including JPMorgan, Bank of America, Wells Fargo and other major industry players are expected to be down -65.1% from the same period last year on -2.1% lower revenues.

Earnings are expected to be down in double-digits at JPMorgan (-51.9% on +2.3% higher revenues), Citigroup (-77.6% & +0.5%) and Bank of America (-66.9% & -5.8%).

The group’s profitability picture is not expected to improve in the current and coming quarters either.

For the Finance sector as a whole (Major Banks industry brings in roughly 45% of the sector’s total earnings), total Q2 earnings are expected to be down -41.8% on -1.8% lower revenues.

The Overall Earnings Picture

The expectation was for a roughly +8% growth at the start of the year, which has now become a decline of -24.4% decline.

Total Q2 earnings (or aggregate net income) for the index are expected to be down -44.8% from the same period last year on -10.7% lower revenues.

Growth is expected to resume next year, with full-year 2021 earnings for the S&P 500 index currently expected to be up +27.4% relative to 2020 estimates. But as strong as next year’s growth estimate is, total 2021 index earnings would still have yet to return to pre-Covid levels.

In other words, S&P 500 earnings in 2021 are currently expected to be modestly below the 2019 level.

These numbers translate to an index ‘EPS’ of $154.73 in 2021 vs. $121.50 in 2020 and $160.65 in 2019.

Q2 Earnings Season Gets Underway

The Q2 reporting cycle will (unofficially) get underway this week. But from our perspective, the Q2 earnings season has gotten underway already, with results from 19 S&P 500 out at this stage. These 19 index members — including NikeOracle and others — reported results for their fiscal quarters ending in May, which we count as part of the official June-quarter tally.

We have 34 S&P 500 members reporting results this week, including the major banks and a number of major operators from other industries. The reporting cycle really ramps up over the next three weeks.

For the 19 index members that have reported already, total Q2 earnings or aggregate net income is down -42.9% on -4.8% lower revenues, with 68.4% beating EPS estimates and only 52.6% beating revenue estimates.

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