A steepening interest-rate curve, the resilience of consumers and a strong post-crisis economy are set to burnish earnings. For the fourth quarter of 2020, seven of the 15 largest U.S. banks are expected to report higher earnings per share than a year earlier, which was the last full quarter before the coronavirus caused a lockdown-induced economic recession. Banks have been on a tear, as investors have looked ahead to the Biden administration and more government stimulus. But the group still lags behind the broad market by a wide margin — which is understandable, as many investors need to be convinced amid a terrible winter that the pandemic will end in 2021.
Schwab is among seven of the 15 listed banks expected to show year-over-year increases in fourth-quarter revenue. The sequential comparison is not as bright, with only a third of the listed banks expected to show fourth-quarter profits exceeding those in the third quarter. Goldman Sach is expected to show the highest year-over-year increase in quarterly earnings per share — 50%. Deutsche Bank analyst Matt O’Connor expects Goldman to report a 26% increase in fourth-quarter investment-banking fees (excluding corporate lending), along with a 20% increase in trading revenue, according to a Jan. 5 note to clients. Capital One Financial Corp. COF and State Street Corp. STT are both expected to report 16% increases in fourth-quarter EPS from a year earlier.
Many of the listed banks (but not Schwab, Morgan Stanley, State Street or Bank of New York Mellon Corp. BK, which have low levels of credit risk), provisions for loan loss reserves were critical items in 2020. The provisions are the amounts added to loan loss reserves in anticipation of credit losses. They directly lower banks’ earnings. Provisions were extraordinarily high during the first quarter when the pandemic began, and even higher during the second quarter. Provisioning activity subsided in the third quarter, as it became clear that federal stimulus, various moves by the Federal Reserve to shore up the economy and moratoriums on evictions and foreclosures helped consumers, landlords and business owners keep loans current. Once again it is important to point out that the brokerage industry’s 12-month price targets may be too short. Even with so much earnings growth expected, the consensus price target for Goldman is only 4% higher than the closing price on Jan. 8.