Earnings Season Kickoff: What to Expect from Bank Results

Tuesday, January 12, 2021 5:59 PM | Neal Farmer

It's that time of year again!

To celebrate the first earnings season of the New Year. As usual, major banks will kick things off at the end of this week.

The first week is important for investors to gauge how the economy is recovering from the pandemic based on the relative performance from some major financial institutions.

The coronavirus pandemic continues to bring massive uncertainty as it very much remains active. New cases are continuing to rise and most analysts expect this trend to continue after the increase in traveling brought about by the holidays. Due to this, earnings are playing an extra important role in analyzing how markets are recovering and where the economy is trending as this pandemic has brought brand new challenges to the world.

Expectations for the Fourth Quarter

Analysts expected superior performance last earnings season for banks as the economy was in a better place after the warmer summer months, but that is no longer the case. Most estimates are predicting a worse fourth quarter for these financial institutions than the previous quarter after stimulus efforts from the CARES Act expired and economic activity slowed with the onset of cooler weather. Meanwhile, the $900 billion stimulus bill that was just passed obviously will not have an effect on the past quarter.

The discontinuation of stimulus effects led to more bearish expectations but the biggest signal for poor performance is coming from jobs reports. The November report showed some concerning signs with a drop in labor force participation and an increase in permanent unemployment with slight decrease in temporary unemployment. December's report was even worse with the economy actually losing 140,000 jobs. The drop in jobs marked the first decrease in eight months as the leisure and hospitality sectors were hurt by Covid-19 cases and colder weather. The labor force participation rate and unemployment rate both remained unchanged at 61.5% and 6.7% respectively. The somewhat positive news from the jobs report was that permanent job losses decreased 348,000 to 3.4 million, still up from the 2.1 million in February 2020.

Earnings Estimates

With all that considered, most analysts are expecting a decrease in earnings for some of the largest banks. JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC), and PNC are reporting before the open on Friday. All but Wells Fargo currently are expected to report a drop in earnings per share (EPS). Additionally, EPS estimates are all below reported 2019 fourth-quarter earnings except for JP Morgan.

What to Take from Last Quarter’s Results

While estimates are all below what these companies reported in the previous quarter, every one of these banks surpassed estimates in for the third quarter. In fact, the average estimates for the fourth quarter are higher than the expectations from Q3 for all of JP Morgan, Wells Fargo, Citigroup, and PNC. These banks significantly outperformed last quarter, largely due to unexpected changes to loan-loss reserves. Major contributions to reserves back in the second quarter hurt the bottom line but adding less each quarter should continue to boost earnings for these institutions. Banks have been lagging behind during the market’s recovery. Investors should keep an eye out for changes in reserves as it signals what banks are expecting going forward as businesses are now mostly open again but high case numbers are hindering potential growth.

The first week of earnings season remains critical for how businesses are recovering as banks are integral to the recovery process and changes in the balance sheet are signals for what these firms are expecting going forward.

Futures are trading higher Tuesday morning following yesterday's dip in equity prices. Commodity prices ticked higher and treasury yields continue to rise. Bitcoin recovered some of Monday's major losses as the largest cryptocurrency rose back above 35,000 after falling below 31,000 yesterday.

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