In Q2 of 2020, bank earnings dropped as banks underwent significant restructures. For example, Deutsche Bank announced a net loss of 77 million euros ($90.3 million) for the period. However, despite the huge losses, even this performance beat analyst expectations. As a result, even though some banks beat analyst expectations for Q2 2020, dire forecasts for Q3 followed.
Now we’re in the middle of bank earnings season for Q3, we’ll ask whether those forecasts were justified and assess whether now is a good time to buy or invest in banking stocks. But first, we’ll analyse the importance of bank earnings season to the market.
The Importance of Bank Earnings Season
For market analysts and investors, bank earnings season is an important event. This is the season gives crucial insights into the outlook of a company. For this reason, during it, we normally see a great deal of volatility in a company’s share price immediately after earnings releases.
For those involved in trading stocks and shares in particular, earnings season helps inform decision making on whether to take a position on a bank’s stock. As traders often operate in the short term, they’re looking for information that will help them capitalise on even the smallest price change. The volatility caused by announcements in bank earnings season is the perfect vehicle for this. Plus, because traders can operate in both rising and falling markets, earning announcements provide the volatility traders require, even if they just hold positions for minutes or seconds.
Were Negative Forecasts for Banks Justified?
Although banks were expected to perform better in the third quarter, market analysts predicted that lower revenue and minimal credit reserve builds would harm banking figures. With associated unemployment and loan losses factored into predictions, many experts believed losses would be par for the course.
However, in spite of this, many of the banks who have reported so far have confounded expectations and outperformed negative forecasts. JPMorgan Chase, for example, posted a third-quarter profit of $9.44 billion, or $2.92 per share. This hugely exceeded the $2.23 per share expected by analysts. Similarly, Goldman Sachs crushed profit estimates for Q3, outperforming company-wide profit estimates by more than $1 billion. UK banks such as Barclays (23rd October), Lloyds Bank (29th October) and NatWest (30th October) are set to announce their results in the coming weeks.
Is Now a Good Time to Invest in Bank Stocks?
Although banks are outperforming market expectations, their results should be taken with a pinch of salt. This is because even though banks are topping their profits from the previous two quarters of this year, they’re not matching their totals from the third quarter of 2019. Plus, analysts are also keen to stress that bank stocks are still exposed to two risk factors that are both relevant at present: they’re recession prone and they’re sensitive to interest-rate fluctuations.
However, in spite of this, banking stocks are currently competitively priced and they often perform well as economies recover. As a result, due to the rich dividends they offer investors, they could be a good option if you’re willing to stick with them for the long term.
In summary, the results from the USA so far suggest that banks are outperforming market expectations for Q3 of 2020. However, the rest of October will be crucial for proving whether this theory is correct. Choppy waters are certainly still ahead for the rest of 2020 and few analysts are predicting a Q4 breakout. However, as economies recover throughout 2020 and early into 2021, historic data suggests banking stocks will perform well. As a result, if you’re willing to hold your position for the medium or long term, banking stocks could be a good investment.
