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US banks face major hurdles in second-quarter earnings

Second-quarter earnings for US banks will be dominated by the poor economic outlook, which will have had a major impact on their profitability.

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Difficult Q2 earnings lie ahead

It will be a tough second-quarter (Q2) earnings season for most of corporate America, but for the nation’s big banks it may well be even tougher. The sector faces the prospect of thinner margins and an increase in bad loan provisions, with key institutional clients weathering a volatile market and major corporate borrowers bolstering their cash reserves.

Revenue is expected to fall overall for the sector, but costs will rise as the firms spend their cash on providing safe working environments in offices as well as equipment for home working, along with a general drop in demand for activities such as mergers and acquisitions (M&A) and initial public offerings (IPOs). This will put direct pressure on margins, hitting profitability and reducing the attractiveness of the major banks overall.

Provisions for bad loans will have to increase, as companies default on their borrowing or defer payments, putting yet more stress on profitability levels. Banks, of course, are essentially a play on the overall health of an economy, and as the US economy looks set for a long period of negative growth at worst and weak growth at best, the sector will struggle to hold its attractiveness for investors.

Bright spots won’t offset overarching problems

The two bright spots will be increased trading activity, as major institutional clients such as hedge funds and fund managers take advantage of the coronavirus-fuelled volatility seen since February, and also a rise in fees from fundraising activities by big companies looking to boost their cash reserves. But these will not offset the problems entirely, providing only some relief for the sector, especially in the case of lending, since the huge cuts in interest rates by the Federal Reserve (Fed) will have reduced the income on these loans for the lenders.

However, there is the hope that the banks will have seen some improvement in the latter part of Q2 and the early part of the new quarter. Like most earnings, this time around the real focus will be on the outlook for Q3 and Q4, not on what has already happened. If banks can provide enough of a positive view then their stock prices may do better, even after a substantial rally from the March lows.

JPMorgan share price: technical analysis

JPMorgan's stock continues to see an uptrend from the March lows, although not a particularly impressive one. If the price can avoid a close below $90.00 then it will hold rising trendline support, and the creation of a higher low around this level would help reinforce a guardedly bullish view.

JPMorgan price chart Source: ProRealTime
JPMorgan price chart Source: ProRealTime

Goldman Sachs share price: technical analysis

For Goldman Sachs, while the price dropped below one line of trend support from the March lows, it succeeded in holding the 100-day simple moving average (SMA) at $186.00, rallying from this level. Further gains target $220.00, while a drop below $185.00 would bring the April and May support zone around $170.00 into view.

Goldman share price Source: ProRealTime
Goldman share price Source: ProRealTime

Citigroup share price: technical analysis

It is a similar story for Citigroup, which has seen a gain of almost 60% from the March lows. Having held trendline support from this low, the bullish view may be reinforced with bullish crossovers in momentum indicators like stochastics and moving average convergence/divergence (MACD), targeting the recent June high at $62.00 in the first instance.

Citigroup price chart Source: ProRealTime
Citigroup price chart Source: ProRealTime

Wells Fargo share price: technical analysis

Unlike the others, Wells Fargo’s stock cannot be said to be in an uptrend, and indeed it looks set to head back towards the May low at $22.00. The move below $25.40 is a bearish development, and for the time being there is little indication of a recovery that will put the stock back on course to test the early-June highs.

Wells Fargo price chart Source: ProRealTime
Wells Fargo price chart Source: ProRealTime

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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