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Banks Down on Bleak Revenue Outlook as Loan Demand Falters

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At the 2020 Barclays Global Financial Services Conference, top executives from some of the global banks warned investors of disappointing revenue performance in third-quarter 2020 and the full year. This is mainly due to low interest rates and weak loan demand.

Following this, shares of several major banks including Bank of America (BAC - Free Report) , JPMorgan (JPM - Free Report) , Citigroup (C - Free Report) , KeyCorp (KEY - Free Report) and PNC Financial (PNC - Free Report) declined in the range of 1.8-7%.

Details

Per BofA CEO, Brian Moynihan, there is very little appetite for new loans among corporate clients. Further, the company’s loan balance has dipped to the pre-pandemic level and it seems that the loan book is likely to shrink for the first time since 2015 in the third quarter.

Moreover, uptick in prepayments is expected to hurt net interest income (NII) growth. Thus, BofA’s NII in the current quarter is likely to be down $600-$700 million on a sequential basis.

Also, Moynihan noted that decent performance of fee income components will offset the negatives to an extent. Trading revenues (one of the saviors for all the major banks’ in second-quarter 2020) is projected to be up 5-10% year over year, driven by rise in both equity and fixed income.

Also, investment banking (IB) fees are anticipated to rise 3-5% from the prior-year period. BofA also sees solid wealth management revenues and a modest growth in consumer fees during the quarter, given “the spending coming up the card income.”

Further, this Zacks Rank #3 (Hold) bank is likely to add “very modest” amount to its reserves. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

On the other hand, JPMorgan’s chief financial officer, Jennifer Piepszak stated that the company is likely to keep loan-loss reserve constant for the third quarter. Then talking about NII, she also gave similar reasons as Moynihan and projected NII to be approximately $55 billion for 2020. This is lower than previous guidance of $56 billion.

On fee income front, JPMorgan expects markets revenues to be up 20% year over year for the current quarter, while IB fees are anticipated to rise in mid-single digits rate. Further, Piepszak noted that “mortgage production remains very strong here in the third quarter.”

Also, Piepszak provided updated guidance on the cost front. The company now expects expenses to be $66 billion for 2020, up from $65 billion earlier projected. The main reason for the increase is “revenue and volume-related expenses.”

Similar to these two major banks, Citigroup also provided dismal revenue outlook. The bank expects overall revenues for the third quarter to decline in the high single-digit range on a year-over-year basis, mainly due to low consumer loan demand. While fixed income and equity revenues are likely to be up in the low double-digit range, it is not expected to outweigh fall in NII.

Likewise, for Wells Fargo (WFC - Free Report) and PNC Financial, shrinking loan demand continues to be a major near-term headwind. This is, in turn, is expected to hamper NII growth in the quarters ahead.

Our Take

Similar to the first half of 2020, banks’ financials are expected to get support from fee income. However, as economic slowdown continues to hamper business activities, demand for loans is not likely to improve much. This coupled with low rates is expected to hurt NII, which constitute a major portion of banks’ revenues.

Nevertheless, manageable expense levels and modest loan loss provisions are expected to offer some support. Apart from these, as the Federal Reserve continues to support the economy and banks have ample liquidity, overall financial performance of the banks is likely to be decent, going forward.

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