Over the first three quarters of 2020, loan loss reserves were a significant drag on banks’ earnings. However, with negative provisioning accelerating during Q4 2020, the top banks in the US received a boost in earnings.
According to the research data analyzed and published by Finaria, four of the largest US banks had an aggregate provision deficit of $6.74 billion compared to reported net charge-offs.
The four banks released a cumulative $5.985 billion from their loan provision reserves during the quarter. JP Morgan Chase reported having released $2.9 billion in the period, while Citigroup released $1.5 billion. Bank of America released a total of $828 million and Wells Fargo, $757 million.
The four banks had a collective $19.06 billion in aggregate provision surplus during Q1 2020. In Q2 2020, the figure increased to $30.11 billion.
Reserve releases began in Q3 2020, albeit at a slow pace, with an aggregate provision deficit of $130 million. During the same quarter, there was also a 77% decline in overall provisioning for US banks according to SP Global.
In total, US banks set aside a cumulative $14.25 billion in Q3 2020, down from nearly $60 billion in Q2 2020. At the end of Q3 2020, total bank reserves amounted to $244.27 billion, close to double the amount in Q3 2019. The figure was in the environs of the provisions seen during the 2007 to 2009 financial crisis.
The increase in releases seen during Q4 2020 came about due to improved economic forecasts. These stemmed from the increased stimulus and vaccine development and distribution, which translate to reduced downside risk.
Credit quality and regulatory capital ratios were strong in Q4 2020. There were positive retained earnings resulting from the absence of share buybacks and continued pay-downs for commercial loans.
JP Morgan Equities Trading Revenue Soars by 32% in Q4 2020
JP Morgan Chase’s earnings for Q4 2020 received a $1.9 billion boost from the $2.9 billion reserve release, with $1 billion going to charge-offs. After the release, the bank still had loan loss reserves of more than $30 billion.
Based on its report for the period, the earnings per share (EPS) were $3.79, compared to the Refinitiv analysts’ estimate of $2.62. The credit release boosted EPS by 72 cents. Notably though, even without the boost, the EPS would still have beaten analyst estimates.
The bank’s revenue for the period totaled $30.16 billion, surpassing the $28.7 billion analyst estimate. Consumer banking revenue sank by 8% to $12.73 billion.
However, the bank had a record Q4 in terms of trading, posting $1.99 billion in equities trading revenue, a 32% year-over-year (YoY) uptick. Fixed income trading grew by 15% to $4 billion.
There was a 7% increase in commercial banking revenue to $2.46 billion and a 37% uptick in investment banking revenue to $2.5 billion. Wealth management revenue shot up by 10% to $3.87 billion.
On the other hand, Citigroup’s earnings for Q4 2020 fell by 7% to $4.63 billion, equivalent to $2.08 per share. The figure, however, beat Refinitiv analysts’ estimate of $1.34 per share.
Its revenue declined by 10% to $16.5 billion against an estimated $16.7 billion. Fixed income revenue shot up by 7% to $3.1 billion while equity trading revenue spiked by 57% to $810 million.
Bank of America Profits Slump by 28%, Revenue by 10%
Bank of America posted mixed results in Q4 2020, with profit dropping by 28% to $5.47 billion, equivalent to 59 cents per share. Revenue tumbled by 10% to $20.2 billion, missing the Refinitiv analyst estimate by $500 million. The shortfall in revenue was partly attributed to underperformance in the trading division. Fixed-income revenue totaled $1.74 billion against an expected $2.11 billion according to FactSet analysts.
Bank of America announced plans to buy back shares worth $2.9 billion plus another $300 million to offset shares that it gave to employees.
Similarly, Wells Fargo posted mixed results, with net interest income totaling $9.275 billion against an expected $9.34 billion according to FactSet. EPS was 64 cents, higher than the Refinitiv estimate of 60 cents.
In addition to the loan reserve release, the company’s earnings included a $321 million hit from customer remediation accruals and a $781 million restructuring charge.
The company’s revenue for the period totaled $17.93 billion against an $18.127 billion forecast. Consumer banking and lending had a 5% revenue decline from $9.08 billion to $8.61 billion. Commercial banking slumped 18% from $2.9 billion to $2.388 billion. There was also a 25% decline in equity markets trading revenue leading to a drop of 7% in corporate and investment banking revenue.