“2020 was a disaster,” said Jim Shanahan, who covers Edward Jones’ banks. “It wasn’t the banks’ fault. It was like we had an alien invasion in the second quarter.”
The biggest driver of declining profits – or direct losses, in the case of Wells Fargo – is the fact that banks are preparing to deal with a pile of toxic loans caused by the pandemic.
Loan losses of $ 2.1 trillion
Analysts agree that banks will be forced to further increase loss-absorbing reserves – but the real question is by how much.
“It’s getting really ugly,” said Kyle Sanders, another bank analyst at Edward Jones.
S&P Global Ratings warned last week that banks around the world will eventually experience credit losses of approximately $ 2.1 trillion between this and next year.
Apart from bankruptcies and high unemployment, bank profitability is affected by extremely low interest rates. Banks make money with the spread between interest on loans and payments on deposits. At the moment this spread is very narrow, making it difficult to make money.
Even worse, the Federal Reserve has signaled that zero interest rates will not go away as quickly.
“Core profitability is still a challenge in a ZIRP [zero interest rate policy] World, “Jefferies analyst Ken Usdin wrote to customers last week.
Wells Fargo’s first dividend cut in a decade
Indeed, Wells Fargo is the only major bank that is expected to suffer a loss in the second quarter. This underlines how much she had to fight before the pandemic.
The problem for Wells Fargo is that it has less financial leverage than its peers.
Unlike its competitors, Wells Fargo can no longer lend to offset low interest rates. This is because Wells Fargo continues to be prevented by the Federal Reserve from expanding its balance sheet (except to lend to small businesses under the federal government’s paycheck protection program).
And Wells Fargo can’t cut costs too low because its scandals have forced it to increase compliance and technology spending.
Wells Fargo is not the only major bank with a falling share price. JPMorgan, Bank of America and Citigroup lost about a third of their market value this year.
Greed is making a comeback
Investment banks were the bright spot in the banking industry because they benefit from the reviving capital markets.
A resurgent pandemic means more credit losses
In addition to navigating in turbulent markets, banks are also struggling with increasing coronavirus infections in Sun Belt states such as Texas, Arizona and Florida. And large banks face an enormous risk of corona virus hotspots.
According to an analysis by Morgan Stanley, Bank of America had deposits of $ 591 billion in the top 50 countries in the United States where most new coronavirus infections occurred last month. JPMorgan ($ 427 billion), Wells Fargo ($ 389 billion) and US Bancorp ($ 151 billion) followed as the top US dollar banks in these countries.
The health crisis in these areas and the risk of renewed restrictions will create “increased stress” for local businesses and potentially greater credit losses for banks, Morgan Stanley said.
Add that to the list of obstacles banks are currently facing.