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Analyst previews bank earnings: ‘going to be messy’

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  • Bank stocks are on deck to report earnings as soon as Friday morning.
  • One bank analyst expects reports to be “messy.”
  • But what matters more is the group’s 2021 outlook and confirmation of buyback programs.

Earning season for the bank sector kicks off Friday morning and it is “going to be messy,” according to one notable banking analyst.

As expected: rough year for banks

It goes without saying that 2020 was a rough year for the bank sector as the group, The Wall Street Journal reported. Bank profits plummeted in early 2020 as companies were forced to set aside a lot of cash for bad loans.

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But towards the end of 2020, the banking industry faced some catalysts, including strong demand for mortgage and corporate trading revenue, according to WSJ. Banks also avoided a worst-case scenario thanks to action taken by the U.s. government to help support the economy.

It remains unclear how long these catalysts can last — or if it even supported the group in the fourth quarter. However, KBW analyst Brian Klock told WSJ that expectations for “messy” earnings may take a backseat to the group’s 2021 outlook.

Bank stocks started to recover their earlier 2020 losses in the fall season. Most notably, the KBW Nasdaq Bank Index rose 34% from October to December, versus a 12% increase in the S&P 500 index.

Earnings season schedule

First up to report earnings Friday mornings are Wall Street titans, including JPMorgan Chase & Co. (NYSE: JPM). JPMorgan is joined Friday by rival Wells Fargo & Co (NYSE: WFC).

Goldman Sachs Group Inc (NYSE: GS) and Bank of America Corp (NYSE: BAC) are both scheduled to report earnings on Jan. 19. Morgan Stanley (NYSE: MS) investors will need to wait until Jan. 20.

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Earnings expectations

Bank earnings per share on average could come in 8% lower year-over-year in the fourth quarter. Profit should also come in lower sequentially, especially after the group reported better-than-expected results in the third quarter.

Net charge-offs should also rise sequentially in the fourth quarter but should remain notably below historic highs, the bank analyst also noted. 

Other bank analysts have lowered their loan-loss estimates since the early days of the pandemic but this could increase again if the pandemic doesn’t ease, per WSJ.

In conjunction with fourth quarter earnings reports, banks are expected to communicate any plans for share buyback programs, according to WSJ. The Federal Reserve has stepped in and dictated bank buyback programs must pause although the central bank hinted in December it could soon return in limited forms.

“Prudence would call for more modest payouts to preserve lending to households and borrowers during an exceptionally challenging winter,” Fed board member Lael Brainard said in December.

One of the limitations on how much banks can spend on buybacks relates to profit. Between buybacks and dividends, a bank can’t return more cash than the average quarterly profit from the four most recent quarters, according to WSJ.