US bank results to focus on looming loan losses during coronavirus
NEW YORK: How much money will U.S. banks lose on loans because of the coronavirus recession?
Analysts and investors have been struggling to come up with an answer – or at least a reasonable guess – ahead of quarterly reports from JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N), Wells Fargo & Co (WFC.N), and Citigroup Inc (C.N) next week.
Wall Street estimates have changed dramatically from a month ago. Then, analysts called for big bank earnings per share to rise in the first quarter from a year earlier by an average of 2%. Now they see declines ranging from 14% to 42%, according to Refinitiv data.
That is not just because the impact of the global pandemic is changing and hard to quantify, but also because of a new accounting standard that requires banks to estimate losses for the lifetime of loans and set aside money now to cover them.
Those estimates have to be justified to regulators and auditors, and be credible to investors. But they ultimately rely on judgment: a pessimistic management team could decide to take much bigger provisions than optimistic peers at a rival bank, even if they have similar loan books.
To show the difficulty in guessing how that might play out, UBS bank analysts created a table showing two outcomes for earnings per share: one with usual loss reserves, and another that was about one-third lower, based on their assumptions about the new rule.
“And, the truth is we’re probably going to be very wrong,” lead analyst Saul Martinez said in an interview. “The risk is that it is higher.”
Goldman Sachs analysts led by Richard Ramsden cut their estimates for big banks for all of 2020 by 40% this week, all due to additional loan-loss provisions.
Other issues affecting earnings essentially cancel each other out, they said. - Reuters