US Banks and financials kicked off Q2 earnings last week. Results were generally bleak, with many banks setting aside a lot of cash in anticipation of future loan losses. Meaning, the economy will probably get a lot worse, before it gets better. The relative winners were those with large institutional trading floors, that saw a huge spike in fixed-income revenue (JP Morgan, Goldman Sachs, Morgan Stanley). Looking at the results across a few industry leaders – Bank of America Merrill Lynch (BAC), Charles Schwab (SCHW), JP Morgan (JPM), and Wells Fargo (WFC) – a few themes emerged:

  1. Huge reserve builds (anticipating higher loan losses): 
    • Banks put a lot of cash aside, in anticipation of future loan losses due to a weaker economy. JPM & WFC forecast the unemployment rate to stay around 10% through the end of the year. 
    • JPM – increased reserves by 36% or $8.9 bn QoQ. concentrated in card & wholesale 
    • BAC – reserve build of $4bn; up 100% from 2019 
    • WFC –  reserve build of $8.4bn QoQ
  2. Institutional (bond) trading saves the day for banks
    • Though the reserve builds took a toll on earnings, many of the banks did okay-ish due to stellar trading revenues from the investment bank, with revenues up anywhere from 35-170% YoY. 
    • JPM – fixed income trading up 99% YoY & 47% QoQ 
    • BAC – sales & trading revenue up 35% YoY, though down slightly QoQ
  3. Despite increased retail trading volumes, trading revenues were down: 
    • Trading volumes at Schwab were up 126% YoY (1.62 million daily active trades), but revenue per trade decreased to $1.89 vs. $1.97 QoQ, resulting in trading revenue falling 7% YoY
  4. Cash is king
    • Deposits grew & asset managers saw inflows into money markets as clients flocked to the safest asset – cash
    • BAC – Global banking deposits have grown 31% YTD
    • WFC – AUM up $578bn or 17% YoY – higher market valuation & money market flows, equity outflows
    • JPM – Total deposits are up 25% YoY & 16% QoQ and in Asset management, there were $95bn flows into money markets
  5. Net Interest Income** (NII) generally down (big source of revenue): 
    • Declined due to the full impact of lower rates
    • WFC – NII down 18% YoY
    • SCHW – Net Interest Revenue down 14% YoY
    • BAC – NII down 11% YoY
    • JPM – NII down 4% YoY
  6. Wealth Management – clients seeking expertise
    • SCHW – Investment professionals remain in demand, with Schwab Intelligent Portfolios Premium planning appointments increasing 30% from a year earlier
    • BAC – 2Q20 net new households of $6,000 in Merrill Lynch & 500 in Private Bank 
  7. Digital & online solutions: 
    • BAC highlights digital solutions in their quarterly earnings. They highlighted the % of consumer sales online increased to 47% vs. 29% last year. Advisors are also reacting, with 98k WebEx meetings hosted by FAs – up 419%.
    • SCHW – Client utilization of digital advisory solutions remained strong, with balances up 12% YoY
  8. Schwab continued to get new clients:
    • New assets of $137b partly due to the USAA acquisition. Excluding the USAA acquisition assets grew $47bn, with an increase of 552,000 new accounts. Retail accounted for 80% of asset growth vs. 20% RIA/ advisor 
  9. Wells Fargo’s outlook is grim: 
    • Many of the banks did okay-ish, due to an increase in trading volumes. Wells Fargo doesn’t have a big trading division, so their business felt the full brunt of lower rates & a need to increase loan provisions. They cut their dividend by 80% and warned of job cuts ahead (5-10%)
  10. It’s going to get worse – quotes from management: 
    • “the most tumultuous period since the Great Depression” — Bank of America’s CEO Brian Moynihan
    • “May and June will prove to be the easy bumps in terms of this recovery. And now we’re really hitting the moment of truth, I think, in the months ahead.” — Jennifer Piepszak, JPMorgan’s C.F.O.
    • “Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter.” —Charlie Scharf, Wells Fargo’s C.E.O.
    • “I don’t think anybody should leave any bank earnings call this quarter simply feeling like the worst is absolutely behind us and it’s a rosy path ahead.” — Mike Corbat, Citigroup’s C.E.O.

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Charles Schwab – Q2 Earnings

Bank of America – Q2 Earnings

Wells Fargo – Q2 Earnings

JP Morgan Chase – Q2 Earnings