BANKS - Q3 '20 EARNINGS SEASON THEMES

  1. Pandemic – Though state economies reopened over the summer, new coronavirus outbreaks are impacting economic recoveries in states across the country. This could mean an uneven pace of economic improvement in the fourth quarter and early in 2021. Analysts expect this to weigh on loan growth, curb revenue and cut into bottom lines after expected hits to Q3 earnings. The commentary that bankers provide on the economic activity they are seeing in their own markets will be of high interest during earnings calls.

  2. The Paycheck Protection Program – The federal government said it would start to forgive loans made to small businesses under the PPP in early October. However, the Small Business Administration is not off to a swift start. It opened a forgiveness portal on Aug. 10, but as of the start of October, it had not acted on tens of thousands of applications that had been submitted. It’s likely that investors and analysts will be looking for information from banks regarding the number of loans they have submitted for forgiveness, an estimate of how much of their PPP loans they expect to qualify for forgiveness, and guidance on the timing of fee recognition.

  3. Loan growth – Post-PPP, loan growth is expected to prove difficult for many banks. With a cloudy economic outlook and the uncertainty of the pandemic, banks’ risk appetites are curbed and demand for non-PPP loans has declined as businesses pause investment plans, cut costs and lower debt burdens. In August, for example, Fed data showed that demand had declined to levels not seen since the Great Recession. And bond markets are booming, offering an attractive alternative to loans. Analysts will look for exceptions and potential sectors or geographies with relative strength that present new opportunities for banks.

  4. Loan deferrals – Most initial loan deferrals and modifications expired during the third quarter. Investors will be looking for updates on the trends in the level of deferrals, the amount of second deferrals granted, and how banks are managing the risk related to industries that are expected to have a longer recovery period, such as the hotel/motel industry.

  5. Allowance level – Banks boosted loan-loss allowances in the first half of the year as the pandemic accelerated and economic forecasts were downgraded. But forecasts have stabilized recently and are not expected to drive the same level of allowance build as they did earlier in the year. Investors will be looking to understand if allowance levels have plateaued or if further reserve builds are necessary. They will also be interested in how banks perceive the risk to their credit quality should additional government stimulus be further delayed.

  6. Interest rates/Net interest margins – With more than a full quarter having passed since the Federal Reserve dropped its benchmark rate to near zero in response to the pandemic, analysts are expecting more stability in net interest margins. They will be looking for information to help assess which banks are seeing less pressure on earning asset yields, and which ones still have room to bring down deposit costs to offset this pressure going forward.

  7. Deposits – During the first half of 2020, banks were flooded with liquidity as consumers and businesses conserved cash and banked the PPP funding they received. Investors will be interested in understanding how quickly the liquidity built up by clients is being drawn down and any opportunities that banks have to redeploy their remaining excess liquidity into higher yielding assets to support NIMs.

  8. Mortgage activity – Mortgage banking has been one of the few areas of strength this year and helped many banks offset revenue pressures in other areas. Healthy mortgage refinancing activity is expected to continue boosting fee income in the third quarter. Analysts will look for commentary on pipelines heading into the fourth quarter and how much longer the refinancing boom is expected to continue.

  9. Expense management – With revenue headwinds increasing and the shift to digital banking accelerating, more banks are permanently shuttering branches and announcing layoffs. For those banks that haven’t announced similar plans, it’s likely that analysts and investors will be asking about the timing of potential cost-cutting and efficiency initiatives.

  10. Buybacks – Share repurchases were off the table – and remain so for the biggest banks – but many community banks have authorized buybacks, or reinstated previously suspended programs, in recent weeks. Others will likely follow over the rest of this year, analysts have said, because with bank stocks still under pressure, more management teams see bargains and a way to show confidence in their companies. A recent Piper Sandler analysis of 21 banks that have resumed or authorized new buyback programs since June 30, 2020 revealed median outperformance of the NASDAQ Bank index of 2% on the day after announcement and median outperformance of 10% to date since announcement, suggesting that the market has reacted favorably to those banks that have announced reinstatements, extensions, or new repurchase authorizations over the stated timeframe.

  11. M&A – Bank M&A activity effectively froze in May and remained muted over the summer. Deal activity is on pace to be about 60% lower this year compared to 2019, according to S&P Global. Acquisitive banks say the credit quality of sellers has been too difficult to assess when the duration and ultimate impact of the pandemic remain unknown. Bankers, however, say activity will resume in earnest once visibility improves. They note that the main driver for M&A — creating efficiencies by building scale — has greater importance as banks grapple with revenue headwinds.