What Q1 bank earnings season tells us about the US economy (C, GS, JPM, BAC)

By Richard Mason



The US is in a strange state of affairs right now, with joblessness claims expected to top 5 million for the third straight week. That 15% of the country could be unemployed was unbelievable just two months ago but now seems increasingly likely. 

And Q1 earnings for the major investment banks have landed on the mat. 

Goldman Sachs (NYSE:GS) saw its profits fall 46% in the first quarter, with earnings of $1.22bn or $3.11 per share, slightly under Refinitiv projections of $3.15 per share.

All of the investment banks have seen upticks in trading as investors either sold out or reorganised their portfolios towards more defensive options. On that point, the spot price of gold has in recent days hit seven-year highs against the US dollar and flows into gold ETFs have rocketed.  

Traders are loving the volatility in the markets right now as liquidity is high, there is low hanging fruit in shorts and quick turnaround profits are everywhere if you know where to look

So while Goldman’s asset management suffered heavy losses in its debt and equity holdings, elevated bond-trading helped Goldman beat group-wide revenue expectations of $7.92 billion to top $8.74 billion. 

Goldman set aside $1 billion for credit loss. 

JP Morgan (NYSE:JPM) too saw its earnings crushed by coronavirus. It ended Q1 with earnings per share at $0.78, down more than 60% from the same period last year and severely under forecasts of $1.99 per share. Company-wide revenues fell 4.4% to $28.3 billion.

2020 earnings as a whole would be “meaningfully” impacted, CEO Jamie Dimon said, as he heralded the bank’s resilience in the face of “unprecedented challenges”. 

Credit loss provisions topped $8.3 billion, more than six times higher than Q1 2019. 

The more retail-focused banks like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) had worse news to share. 

Bank of America’s consumer business in savings and loans missed expectations by a wide margin. And with the Fed cutting interest rates to historic lows, along with the rising unemployment mentioned above, the picture looks pretty bleak. It put aside $4 billion to cover the threat of personal and business defaults on credit cards and loans, below the $5 billion Citigroup stashed away for the same reason. 

While things like utilities are normally on the Must Pay list, credit cards tend to be the one of the first things households stop repaying when they are in financial distress, so these provisions may well fall short as the US drifts into a 2020 recession.  

Looking wider

It’s something of a truism to say that Wall Street is not the economy. That has become a bad joke in recent days, with hedge funds applying for small business protection loans after rattling off a series of bad bets in the wake of the pandemic. 

After an outcry from banks that a 0.5% interest rate was not juicy enough to make the loans worthwhile, the Trump administration upped that limit to 1%, even at a time when the Fed has cut interest rates to historic lows. 

Stimulus packages aimed at supporting small businesses through the coronavirus lockdown were vast, totalling $500 billion, but analysts suggest that money has already run out, and new plans to inject an extra $250 billion could come before lawmakers as early as this week.

Cure < Problem

President Trump tapped in to a point a major anxiety for the health of the US economy when he said the cure cannot be worse than the problem. 

In a 15 April address in the Rose Garden of the White House Trump said: “The data suggests that nationwide we have passed the peak on new cases. Hopefully that will continue.”

The country is seeing death rates of 1,500 to 2,000 every day, but the rate of new cases of coronavirus infections appear to be slowing. 

And yet recent polls suggest that 80% of Americans would be highly resistent to going back to public gatherings like concerts and sports games, so even if social distancing measures are relaxed as Trump wants. So when to reopen at state level has become the big new political fight. 

Banks are only a cipher for the wider economy: without widespread retail reopening, unemployment at highs not seen since the 1930s and a coronavirus vaccine still a year away, the US recession could be deeper than any of us imagine.


Author: Richard Mason

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

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