The four largest US banks will kick off the earnings season after the Easter break on Tuesday and Wednesday but for the first time after a long time markets will be indifferent whether the results will beat or miss forecasts as investors are aware that the path of earnings is a one-way direction to the downside thanks to the virus-led lockdown. Yet, any indication of how badly the financial sector may suffer could be the trigger for another volatile session in stock markets. The consensus recommendation from Refinitiv analysts is buy for Bank of America and Citigroup, and hold for JPMorgan Chase and Wells Fargo.

Q1 earnings results

JPMorgan Chase, the largest US bank by market capitalization, fared better in Wall Street over the past year than its US rivals in the big four group, with the bank losing -2.44% year-on-year versus the double digit declines of Bank of America (-14.48%), Citigroup (-29.67%) and Wells Fargo (-28.58%), while also slightly outperforming the 3.44% fall in the S&P 500 universe.

In terms of earnings, however, JPMorgan may not be in a better position when banking results for the first quarter come out this week as analysts anticipate a sharp annual decline of around 30% in earnings per share (EPS) for each of the big four. Particularly, JPMorgan is expected to have earned $1.84 per share on average in the three months to March, down from $2.65 (-30.5%) registered in the first quarter of 2019 and below $2.57 (-28%) in Q4, with the most pessimistic prediction standing at -$3.60 and the most optimistic at $2.78. Revenues are also said to narrow, though at a softer pace, to $29,671 billion from $29,851 billion last year while rising above $29,211 billion registered in Q4. Wells Fargo could be the only one to experience a quarterly and a yearly decline in revenues.

US banks could survive 

However, with the Covid-19 freezing most business activities both domestically and internationally and keeping consumers locked at home, it would not be a big surprise if earnings in the second quarter arrive even more painfully. The US is in the epicenter of the virus crisis now and while some slowdown in new cases has brought some smiles over the past week, this is not enough to stop the bleeding in the business sector. The only solution is the invention of an effective cure but there is still some way to go before scientists eventually release an antidote to the markets. Till then, since nobody knows what the virus situation will be in the coming months, companies including banks are expected to continue to suffer from restrictions despite fiscal and monetary support. Note that the massive financial aid from governments and central banks aims to reduce the risk of default and not to provide fresh stimulus in domestic demand as consumers can’t spend in isolation.

The only good news is that the virus and not the banks will be the only one responsible this time round if another economic crisis hits the world in the coming quarters. Also, encouraging is the fact that US banks are in a better shape than before the 2008-2009 crisis and according to JPMorgan’s CEO Jamie Dimon, the latest stress tests showed the bank has enough capital buffers to survive the worst case scenario of a 35% slump in US GDP growth and an unemployment rate of 14% by the end of the year. Nevertheless, the probability of default among the leading US banks is small at the moment, with Citigroup, which has the smallest credit rating with the S&P agency, having the highest probability of 1.36%, and JPMorgan the lowest at 0.40%. It is also worth noting that the big four are setting up independent companies to manage oil and gas assets, while US airlines such as Delta is already in discussion with a group of banks led by JPMorgan for loans of over $2 billion.

Other data in focus

Looking through the balance sheet, investors will be eagerly waiting to see any changes in the loan loss provisions and dividends. Leading banks may have to set aside as much as $164 billion this year as borrowers may struggle to meet their payment obligations. Besides that, a new global accounting standard (CECL) which forces banks to estimate potential future losses on loans from the start of 2020 may suggest higher capital requirements and hence smaller profits and dividends. Thankfully, Congress has recently delayed the new method for a year, but this week’s numbers – which regard the three months to March – may still be subject to the standard. Dividends and other costs will be closely watched amid worries the banks may turn more conservative or even stop payments to shareholders. Yet, the Fed’s rescue package may deter the latter.

While JPMorgan Chase has already warned that a recession and a deep fall in earnings in the second quarter is inevitable through its market update report earlier this month, investors would pay more attention to Q2 EPS and revenue estimates to get a taste of how big the damage could be.

Technical view

In market reaction, the S&P 500, which has almost recovered half of its massive downfall, could lose some ground if financial results from banks this week, particularly loan-loss provisions, show larger than expected increases or/and Q2 projections indicate a more serious deterioration than analysts currently price in.

In this case, the 38.2% Fibonacci of 2,650 of the heavy downfall should reject downside movements to save the market from a sharper decline towards the 23.6% Fibo of 2,476. Beneath the latter, the next target could be the area around 2,350.

Alternatively, if the results beat forecasts and generally the outcome indicates thta banks are pleased with the Fed’s and governments stimulus, the index may revisit last week’s high of 2,818. A break higher could bring the 61.8% Fibo of 2,935 next into view.