An eventful second-quarter earnings season is now in the books for banks, with many beating consensus estimates. The second quarter featured a particularly bleak three-month period of the coronavirus pandemic that included a large chunk of time spent sheltering in place for many states in the U.S. There is still a good deal of uncertainty about how much banks will struggle before the pandemic ends, which is why the sector is lagging behind the general market. But here are five big takeaways from this recent earnings season.
1. Still no pain in the economy
The second quarter was one of the worst economic quarters of the 21st century, yet banks are still not seeing a significant rise in charge-offs (debt unlikely to be collected). JPMorgan Chase's (NYSE:JPM) net charge-offs as a percentage of total loans was 0.64%, up just two basis points (0.02%) from the linked quarter and four basis points from the second quarter of 2019 . Wells Fargo (NYSE:WFC) saw its net charge-offs increase 64% year over year, but it still only makes up 0.46% of total loans. Wells Fargo was also one of the worst-performing banks in the quarter, reporting a $2.4 billion loss .
The massive amounts of government intervention through $1,200 stimulus checks, the Paycheck Protection Program (PPP), and unemployment benefits have helped delay -- and hopefully put off -- some of the pain. "In a normal recession, unemployment goes up, delinquencies go up, charge-offs go up, home prices go down. None of that is true here," said JPMorgan Chase CEO Jamie Dimon on the company's recent earnings call. He added that "you will see the effect of this recession; you're just not going to see it right away because of all of the stimulus ."
2. But banks are expecting heavy losses
Even though they haven't materialized yet, banks are bracing for what could ultimately be tens of billions of dollars of loan losses. Collectively, JPMorgan, Wells Fargo, Bank of America (NYSE:BAC), and Citigroup (NYSE:C) through the first six months of the year have set aside more than $57 billion to cover potential future loan losses. JPMorgan and Citigroup, with their large credit card portfolios, have now set aside enough cash to cover 3.32% and 3.89% of their total loans, respectively.
3. Loan deferrals
One part of the gap between the huge provisions banks are taking in anticipation of loan losses, and the small amount of actual charge-offs, is likely found in all of the loan deferrals that banks have been granting to help their customers struggling due to the pandemic. Bloomberg reports that JPMorgan, Bank of America, Citigroup, and Wells Fargo collectively have more than $151 billion of "loans with payment in deferral" through the first six months of the year . This is one of the biggest variables for banks and analysts who are trying to determine what percentage of this pool will turn into charge-offs, nonperforming assets (loans that haven't had a payment for 90+ days), and delinquencies, and what portion might come back to being healthy borrowers.
JPMorgan CFO Jennifer Piepszak said on the company's recent earnings call that while it's still too early to draw conclusions, credit card deferrals were trending in a better direction, with fewer than 20% of accounts that initially asked for deferral asking for additional assistance. The home lending loans, however, were seeing a higher percentage of accounts go into new deferral plans . Bank of America CEO Brian Moynihan also reported positive trends with credit card loan deferrals and those in the bank's business practice solutions group, which mostly includes loans to doctors and dentists that were shut down at the end of the first quarter and beginning of the second. But Moynihan also said that commercial loan deferrals make up nearly 2% of total loans, which is certainly a sizable number .
4. Trading revenues surged
While still down considerably from last year, banks were able to generate somewhat decent earnings considering the huge sums of cash they had to set aside for potential future loan losses. JPMorgan turned a nearly $4.7 billion profit in the quarter ; Bank of America did $3.5 billion ; and Citigroup generated a roughly $1.3 billion profit . This is largely because trading revenues helped these banks offset other divisions that were struggling. In the second quarter alone, JPMorgan generated record revenue of $33.8 billion, powered by fixed-income market trading revenues of $7.3 billion . Bank of America reported total sales and trading revenue through the first six months of the year of nearly $8.8 billion, up more than $2 billion from the first six months of 2019 . And Citigroup's nearly $10.4 billion in fixed-income trading revenue through the first six months of the year was up 53% from the first half of 2019 . Trading and investment banking revenues will likely not stay this hot forever, but they could still be a much-needed bright spot over the next few quarters.
5. Keep an eye on dividends
Some large banks such as Wells Fargo and Capital One (NYSE:COF) were forced to drastically cut their quarterly dividend. Currently, the Federal Reserve is capping dividends to an amount not greater than the average net income of the last four quarters. While this is a temporary cap, there is talk that it may continue into the fourth quarter of the year. If it does, more bank dividends could be in trouble. In the average net income calculation, most banks would lose a profitable quarter from 2019 and likely replace it with a less profitable quarter, reducing the amount banks could ultimately pay out.