JPMorgan, Wells Fargo, Goldman Sachs and other banks report their results next week. What Wall Street is watching.

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Photograph by Jeenah Moon / Bloomberg


Prepare for banking gains. The nation’s largest banks will release their first quarter results next week, and Wall Street is eager to hear how the banks are doing well amid the coronavirus pandemic.



JPMorgan Chase

(ticker: JPM) launches big bank profits on Tuesday alongside



Wells fargo

(WFC).



Bank of America

(BAC),



Citigroup

(VS),



Goldman Sachs Group

(GS), and



Morgan stanley

(MS) will share the results later in the week.

It has become a common refrain for Wall Street analysts to say that it is not the results of the previous quarter that matter as much as the outlook that CEOs give on earnings calls. It’s hard to imagine that there is a time when this is truer than now.

The economy got off to a flying start at the start of the year, with the stock market hitting new highs just two months ago. But things quickly changed as the first known cases of the coronavirus emerged in the United States in the back half of the quarter, when much of the economy was ordered to shut down.

Banks, meanwhile, have had to contend with reduced interest rates to near zero, credit problems affecting their customers, as well as their role in supporting the failing economy with secured loans. by the government for small businesses.

Analysts have struggled to rate banks, with a lot of revisions of their models several times over the past few weeks. The sector has sold more aggressively than the overall market due to the effects of low interest rates and expected loan losses. Many banks are now trading below book value. But this week, the KBW Nasdaq Bank Index (ticker: BKX) had its best week since May 2009, climbing 25%, according to FactSet data.

Here’s what Wall Street will look for when banks publish their earnings:

1. Trading income will increase: During the volatile first quarter, it should come as no surprise that the trading revenues of the big banks are on the rise. As a perspective, the average daily trading volume on the Nasdaq was more than twice as high in March as it was in the past five years, according to FactSet. At the start of last month, Citigroup CFO Mark Mason told a conference that trading revenue would be up in the mid-number range, and that was just days before some of the most volatile days on Wall Street.

2. Increase in loan loss reserves: With many sectors under pressure, namely energy, airlines and restaurants, analysts expect banks to increase their loan loss provisions this quarter. The expected boost follows the adoption by banks of the current accounting framework for expected credit losses (CECL) at the start of the year, in which they must estimate in advance any expectation over the life of a ready.

“We expect much higher than expected loan loss provisions, reflecting the negative impact of COVID-19 on the economy, lower energy prices and the introduction of CECL,” said Jason Goldberg, analyst at Barclay’s, in a note Wednesday.

3. Impact of low interest rates: Banks will also find themselves crushed now that the Federal Reserve quickly cut interest rates by 150 basis points to near zero last month. Since the changes occurred at the end of the quarter, the impact on net interest margins is likely to be felt more in the second quarter and beyond than in the first quarter, Goldberg wrote. And with the Fed’s intention to keep interest rates low until the economy recovers, this is something banks will be grappling with for some time.

4. Dividend security: American bank investors are used to reaping good quarterly dividends, but there is some fear that they will not continue to do so as during the pandemic. Eight of America’s biggest banks announced last month that they were halting buybacks to be able to meet the needs of their customers, raising fears that dividends were next. Then, European banks were forced by regulators to suspend their dividends during the pandemic.

Overall, Wall Street is optimistic that US banks won’t be forced to do the same. Banks undergo annual stress tests, which determine whether they are still able to return capital to shareholders under difficult conditions. But discussions resumed this week after JPMorgan CEO Jamie Dimon wrote in his annual letter to shareholders that there is an “extremely unfavorable scenario” in which the bank “would consider” suspending its dividend. If unemployment rose to 14% and quarterly GDP fell 35% without recovering, the bank would consider suspending the dividend, but only out of “extreme caution,” Dimon wrote.

5. Outlook: But it’s not just bank results and forecasts that Wall Street will be watching. Compared to the 2008-09 financial crisis where risk-taking by banks crippled the economy, banks are widely seen by analysts as a solution to the current crisis, provided they lend to small businesses impacted by crisis. And while a lot of economic data is lagging behind, banks are at the forefront of how the economy is going.

Over the past week, banks have received hundreds of thousands of paycheck protection loan applications. Analysts will be curious about the details of the industries and geographies making these requests, as well as what information they can give for their continued operations.

All in all, it’s going to be a wild ride next week.

Write to Carleton English at carleton.english@dowjones.com

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