Banks-Prepare for Loan Failures. Hybrids and Investment Banks fare better than Commercial

The Economist October 17, 2020 pp60m |Finance&economics|Wall Street| “The calm after the storm” “Banks say they are prepared for losses. Now What?”



Summary of the article

From Q2-Q4 2019 banks off-sets for bad loans closely match actual charge-offs. With the pandemic large “Loan-loss provisions” have been set aside far exceeding actual charges off in Q1 and Q2 of 2020 about $23B vs. about $5B and about $33B vs. about $6B. Q3 is more closely-matched at $7B vs $5B in actual charge-offs. Under stimulus rules banks can’t buyback stock but are either saving cash or investing. Bank of America (BAC) has added branches including 2244 adds on RM2244 eastbound renovating the old Capital One facility up from the Grove. Rumors are $1M was spend on the conversion. Within a mile we now have BAC westbound, WFB eastbound and Chase westbound on RM2244 west of TX360. Morgan Stanley bought “Eaton Vance, an asset manager for $7B. That came just days after it completed its purchase of E*Trade, an online trading platform.” Cash in reserve will help should matters worsen with respect to managing the COVID economy.

How have these stocks performed?

The investment banking sides have done well with “trading revenues…up to around 20%” Q3’20 vs Q3’4 for four of the top five banks. This was down from 60% YOY Q2 performance. Commercial banks having to make provisions and write-off loans experienced losses which offset investment gains for the hybrid banks “Bank of America, Citigroup and JP Morgan Chase.” Wells Fargo primarily a commercial bank “lost money.” Investment banks Goldman Sachs and Morgan Stanley “posted stellar profits.” Investors “have their doubts…share prices are still a third below” early 2020.