Banks – Q2' 20 Earnings Season Themes

1. Pandemic/Recession – Though state economies reopened in May and June, new coronavirus outbreaks are interrupting economic recoveries in states across the country. With great disparity existing between states - and even counties within the same state - banks should be prepared to provide commentary on the economic trends they are seeing in their specific markets.

2. Credit quality – Banks boosted loan-loss allowances in the first quarter in anticipation of mounting problems caused by the pandemic. But loan deferrals and government rescue plans may have blunted the full impact of the recession, and many analysts are sharpening their focus on possible new threats to credit quality and looking for guidance on the expectations for continued reserve building throughout the year.

3. The Paycheck Protection Program – After backing some $520 billion in loans meant to preserve workers' jobs during the coronavirus pandemic, the Small Business Administration's PPP was set to expire on June 30. However, with $130 billion of the $660 billion allocated to the program remaining, new legislation extended the application period until August 8. While the extended application period is welcomed, questions persist around whether this support is sufficient to bridge small business owners from recession to recovery. The evolving rules around forgiveness also create uncertainty around the timing that banks will recognize PPP-related fees.

4. Loan growth (or lack thereof moving forward) – Federal Reserve H.8 data point to double-digit annualized second-quarter loan growth for community banks. But analysts say the growth was driven by PPP loans, and many are starting to question where - or if - banks can generate loan growth in the second half of the year, particularly if the pandemic persists and creditworthy borrowers dwindle in number.

5. Deposit growth – Fed H.8 data also show robust deposit growth throughout the second quarter, with banks benefiting from inflows of PPP funds, while other customers pulled money out of a volatile stock market and put it in bank accounts viewed as safe havens. The sustainability of deposit growth is likely to be of interest during earning season.

6. Interest rates/Net interest margins – The Federal Reserve dropped its benchmark rate to near zero as the pandemic settled in. The lower rate environment should help banks bring down deposit costs, but many have cautioned that rates are coming down faster on loans, pressuring net interest margins in the second quarter. NIMs will inevitably be a key metric of focus, as will the amortization schedule being used for the recognition of PPP fees.

7. Noninterest income – In earnings previews, analysts have projected that second-quarter fee income declined slightly and that noninterest income for all of 2020 should increase in the low single-digits - driven by mortgage refinancing - but that is based in part on an economic recovery in the second half of the year.

8. Expense management – With revenue potentially difficult to generate in coming quarters, analysts are bound to ask questions about new cost-cutting programs. Some analysts have written that they expect banks that have boosted digital banking business during the pandemic to consider shuttering more branches to rein in brick-and-mortar and staffing costs. Others question whether community banks have much room to cut.

9. Capital – Share repurchases are off the table for now, but investors will press for information on the outlook for dividends. Most big banks in June - Wells Fargo a notable exception - signaled that their dividends were safe. But investors will expect color and/or assurances from community banks. Additionally, several community banks raised capital in the second quarter, characterizing the moves as proactive steps to create strong buffers at a time when markets are open and deals are reasonably priced.

10. M&A – Bank M&A activity was steady in 2019, with more banks seeking scale and efficiencies through deals, fueling expectations for ongoing consolidation in 2020. But the pandemic changed that. Deal activity is down about 70% this year, according to S&P Global, with only a handful of acquisitions announced since mid-March. Acquisitive banks have said they have moved to the sidelines, for now, arguing that the credit quality of sellers would be too difficult to assess when the duration and ultimate impact of the pandemic remain unknown.

We are closely monitoring the latest trends in bank communications practices and helping our clients find the best ways to keep their investors and analysts informed. Please feel free to contact us if we can be of any assistance to your investor relations program.