What the Big Banks Aren’t Advertising in Their Earnings Reports.
The headlines this week are celebrating Goldman Sachs and JP Morgan’s 2nd quarter results. Goldman’s total revenue of $13.3 billion is down by 11% year-over-year, with an increase of 2% in net earnings to $2.42 billion. JP Morgan’s revenue was $33 billion (up 15%), with $4.69 billion in net income (down 51% year-over-year). This is better than anyone would have predicted in early March, when the stock market was in a free fall. So, what happened? Are we in a V-shaped recovery? Is the worst behind us?
The Federal Reserve is Buying Up Everything
Prior to the Coronavirus Recession (which started officially on February 19, 2020), over half of the S&P500 companies were heavily leveraged, and were congregated at just above junk bond status – at BBB.
Junk Bond Gathering
13 banks are at BBB, with Wells Fargo not far behind.
This debt party included a lot of major U.S. banks. By March 15, 2020, when the Federal Reserve Board had their emergency meeting, only the most creditworthy companies were able to borrow money (according to the statement that Jerome Powell made prior to the FOMC press conference). So, the Federal Reserve Board opened up the flood gates and began flushing these illiquid markets with cash. In the July 10, 2020 report to Congress, the Federal Reserve Board revealed that over $107.3 billion had been loaned to prop up the Paycheck Protection Program, bonds, money market funds, ETFs, loans, mortgage-backed securities, corporations, municipalities and the broker-dealers who serve them.
Public debt is now $26.5 trillion, a full $3 trillion above what it was at the beginning of the year.
So, all is well, right? Well, this is better thought of as a noble effort to keep things running, so that there can be a more orderly exit into bankruptcy for those firms that are struggling the most. (The same thing happened in the Great Recession.) Retailers continue to file for debt restructuring in droves, with Brooks Brothers and Neiman Marcus succumbing to the Retail Apocalypse this year. Other corporations that were unable to continue operating business as usual, even with the Federal Reserve blank check, include Hertz and Chesapeake Energy. So far, there has been no run on the banks, nor have mutual fund companies activated redemption gates and liquidity fees (as many have in Europe). However, the mega banks do have more than a few phantoms in the closets that are worthy of noting, including speculation, credit loss reserves, Wells Fargo’s dividend rate cut and Goldman Sachs $2 Billion Malaysian Nightmare.
According to S&P Global in their latest report on the Federal Reserve’s Bank Stress Test Results, “An idiosyncratic dividend cut by a bank to levels well below peer medians could … have negative rating implications.” Based upon new Federal Reserve Board requirements that dividends do not exceed the average of net income over the preceding four quarters, some banks may need to suspend or cut their dividends. Companies that could fall into this dividend guillotine include: Capital One, Wells Fargo, Ally Financial Inc., Citizens Financial Group Inc., Discover Financial Services, Huntington Bancshares Inc., and KeyCorp.
Wells Fargo Slashes Dividend by 80%
While quarterly revenue was up year-over-year by 15% to $17.8 billion, Wells Fargo reported a colossal net loss of -$4.7 billion. Not surprisingly, in the earnings press release, the company announced they would be cutting their dividend from $0.51/share to $0.10/share – an 80% haircut for fixed income investors (subject to board approval, or FRB enforcement, whichever comes first).
Many of the banks that are struggling to keep their net income above their dividend payments advised shareholders on June 30, 2020 that their capital stress test results landed them at the bottom of what is acceptable. All indicated they would maintain their dividend payout at current levels. They, like Wells Fargo, may have to sing a different tune once their 2Q 2020 earnings are announced, however. Below are the companies announcing earnings this week and next.
JP Morgan’s CEO Jamie Dimon boasted to analysts on the 2Q 2020 earnings call that his bank “can easily get through very, very tough times and never cut the dividend.” Meanwhile, the bank has beefed up its credit loss reserves to $10.5 billion – up $9.3 billion from a year ago. One wonders if that declaration will come back to haunt him.
Goldman Sachs $3 Billion Malaysian Nightmare.
Speaking of haunting, Goldman Sachs Malaysian nightmare may end in a settlement valued at over $3 billion. The bank has been trying to slink out of a guilty declaration for over a year. Goldman Sachs is accused of misleading bond investors into a $6.5 billion deal, where the funds were misappropriated by former Malaysian politicians. The traders involved have been banned from financial services for life. The court case was stalled out due to the pandemic and a change in leadership in Malaysia. The next hearing is set for September 4, 2020, according to Bloomberg.
Between the shenanigans, the capital stress test bombs, the dividend cuts and the banks that are congregated just above junk bond status, investors should be wary about swooning over a headline that a bank’s earnings report wasn’t quite as bad as analysts predicted. The world that greets us once the pandemic recedes will be very different from the lifestyles that were so familiar back in February. The trends of Work From Home, Intergenerational Housing and high unemployment will be the New Normal, at least for awhile. A time-proven plan is well-diversified and annually rebalanced. Buy & Hold, jumping in and out of the market or trading on headlines are all at risk of massive losses.
As we learned between February 19, 2020 and March 23, 2020, when the Dow Jones Industrial Average dropped 35%, the moves in today’s world are too swift to react to. Having your plan in place now will protect you.
If you don’t know what you own, or how protected your wealth and retirement are, our Investor Educational Retreat or an unbiased 2nd opinion can offer you the information and wisdom you need now. Call 310-430-2397 or email info@NataliePace.com to learn more. Click on the banner ad below for additional information on the Oct. 3-5, 2020 Online Financial Empowerment Retreat. Register by July 31, 2020 to receive the best price.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.