“2020 has been a disaster,” said Jim Shanahan, who covers banks at Edward Jones. “It wasn’t the banks’ fault. It was like we had an alien invasion in the second quarter.”
The main driver of the reduction of profits, or direct losses, in the case of Wells Fargo, is the fact that banks are preparing to deal with a lot of toxic loans caused by the pandemic.
$ 2.1 trillion in credit losses
Analysts agree that banks will be forced to further increase loss-absorbing reserves, but the real question is how much.
“It is going to be really ugly,” said Kyle Sanders, also a banking analyst at Edward Jones.
S&P Global Ratings warned last week that banks around the world will finally suffer credit losses of approximately $ 2.1 trillion between this year and next.
Beyond bankruptcies and high unemployment, bank profitability is being crushed by extremely low interest rates. Banks get money from the differential between the interest charged on loans and what is paid on deposits. At this time, that differential is very narrow, making it difficult to earn money.
Worse yet, the Federal Reserve has signaled that zero interest rates will not go away anytime soon.
“Basic earning power remains a challenge in a ZIRP [zero interest rate policy] world, “wrote Jefferies analyst Ken Usdin in a note to clients last week.
Wells Fargo’s first dividend cut in a decade
In fact, Wells Fargo is the only major bank expected to lose during the second quarter, a point that underscores how much it was struggling even before the pandemic.
The problem for Wells Fargo is that it has fewer financial levers than its peers.
Unlike its rivals, Wells Fargo cannot make any more loans to make up for low interest rates. This is because the Federal Reserve still prohibits Wells Fargo from increasing its balance (except for making small business loans under the federal government’s Paycheck Protection Program). I think we need a brief (one sentence) explanatory, for those who don’t remember why WF is under the Fed’s pulse.
And Wells Fargo can’t cut costs too much because its scandals have forced it to increase spending on compliance and technology.
Wells Fargo is not the only major bank with a reduction in the share price. JPMorgan, Bank of America and Citigroup have lost around a third of their market value this year.
Greed is coming back
The bright spot in the banking industry has been investment banks because they are cashing in on the resurgent capital markets.
A resurgent pandemic means more credit losses
Beyond navigating turbulent markets, banks are also grappling with he increase in coronavirus infections in Sun Belt states, including Texas, Arizona and Florida. And large banks have tremendous exposure to coronavirus hot spots.
Bank of America had deposits of $ 591 billion in the top 50 counties in the United States that have seen the most new coronavirus infections in the past month, according to an analysis by Morgan Stanley. JPMorgan ($ 427 billion), Wells Fargo ($ 389 billion) and US Bancorp ($ 151 billion) continued as the banks with the highest dollar exposure to these counties.
The health crisis in those areas and the risk of new restrictions will cause “greater stress” for local companies and potentially greater credit losses for banks, Morgan Stanley said.
Add that to the list of obstacles banks are facing right now.
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