Paul Bagnell

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For investors, Tuesday’s earnings reports from two big U.S. banks may be the most vital set of bank results in years – but not for what the banks disclose about their own businesses. It’s what they have to say about the state of the U.S. economy, and the health of their customers, that markets will be eager to hear.

Five behemoths of Wall Street are due to report earnings this week. JPMorgan and Wells Fargo are set for Tuesday morning. They will be followed by Bank of America and Citigroup on Wednesday. Morgan Stanley is also expected to report this week, but has not yet specified a date.  By the time the week is out, we should know a lot more about how the enormous strains facing U.S. consumers and businesses are manifesting themselves. The results will cover the first three months of calendar 2020, including March, when businesses across the U.S. closed and laid off employees.

Market watchers are saying that whether a bank beats or misses expectations this time around is irrelevant. Huge earning drops are a given, earnings expectations have been slashed, but forecasting banks’ earnings with confidence has become virtually impossible for analysts.   

Here are some things to watch for in those earnings reports:

1. Money set aside to cover loans that may not be repaid in full: These are termed provisions, or allowances, for credit losses, and are expected to skyrocket and be the biggest factor driving profit down. But no one knows by how much. The wave of job losses and business closures in the U.S. has been too sudden to get a handle on. And the banks are offering to defer some repayments (as are Canada’s banks), which could affect their estimates of future loan losses.
    
2. Small business loan losses: Small businesses will be the first to break under the weight of the economic collapse. That may begin appearing in this week’s bank results.
    
3. Vulnerable sectors: Among larger companies, those in the travel, tourism and dining sectors are most likely to be facing credit strains.
    
4. Trading revenue and profit: Market volatility spiked to historic levels during March. That’s the type of environment that gives Wall Street traders lots of room to maneuver. But surges in trading profit will not, by a large margin, offset profit declines elsewhere.
    
5. Jamie Dimon’s commentary in the JPMorgan results and conference call: Dimon, JPMorgan’s CEO, was one of the most compelling observers of the financial crisis a decade ago, and he may be poised to retake that role during the coronavirus crisis.  His letter to shareholders released on April 6 promised more insight when the first-quarter results are issued on Tuesday. In the letter, Dimon said JPMorgan has extended almost US$1 billion in new loans over February and March. Doing that as a “major recession” looms will expose the bank to heightened credit risk, he acknowledged. Dimon also said the bank would be willing to consider the suspension of its dividend in a worst-case scenario. Investors will want to hear more from Dimon on Tuesday morning.