It’s been a wild ride for the Select Bank Revenue(.BLXSBR) and Select Bank Earnings(.BLXSBE) indexes. Revenue for the sector dropped slightly as the Covid-19 crisis started, but remained well above levels from a couple years ago.BLX Select Bank Revenue Index

Bank earnings, however, dropped sharply as banks increased their loan loss provisions in expectation of large future losses:

BLX Global Select Bank Earnings

Last quarter banks complemented their dismal results with gloomy outlooks. Analysts scrambled to adjust their models for the rest of the year. Now that Q3 is done, its looking like the Covid-19 outbreak hasn’t been as bad as banks expected.

Overall, banks have surprised on the upside, easily exceeding exceptionally low expectations set by prior guidance. Of the 24 banks that have reported so far this quarter, 18 surprised on the upside for revenue, and 15 surprised on the upside with earnings. However, they’ve only beat expectations by a small margin. In aggregate bank revenue has exceeded Wall Street Estimates by 1.1%, and net income has exceeded Wall Street Estimates by 0.9%, according to data from Refinitiv.

This table shows how reported revenue and net income has compared to consensus estimates so far this quarter:

Company Name Report Date Revenue – Actual Surprise Net Income – Actual Surprise
Bank of America Corp (BAC) 10/14/2020 0.2% 1.9%
Bank of New York Mellon Corp(BK) 10/16/2020 0.5% 0.5%
Capital One Financial Corp(COF) 10/22/2020 0.1% -1.1%
Charles Schwab Corp(SCHW) 10/15/2020 0.1% -0.2%
Citigroup Inc ( C ) 10/13/2020 0.7% 4.2%
Comerica Inc (CMA) 10/20/2020 0.0% 1.1%
First Horizon National Corp (FHN) 10/23/2020 1.2% 4.8%
Goldman Sachs Group Inc (GS) 10/14/2020 4.2% -3.1%
Huntington Bancshares Inc (HBAN) 10/22/2020 -2.2% -2.4%
JPMorgan Chase & Co (JPM) 10/13/2020 2.2% 2.4%
KeyCorp (KEY) 10/21/2020 0.1% -3.1%
M&T Bank Corp (MTB) 10/22/2020 0.4% 1.2%
Morgan Stanley (MS) 10/15/2020 3.0% 6.1%
Northern Trust Corp (NTRS) 10/21/2020 -0.4% 1.0%
People’s United Financial Inc (PBCT) 10/22/2020 -0.1% 3.9%
PNC Financial Services Group Inc (PNC) 10/14/2020 0.5% 0.4%
Regions Financial Corp (RF) 10/20/2020 -0.4% 0.1%
State Street Corp (STT) 10/16/2020 0.7% 4.9%
SVB Financial Group (SIVB) 10/22/2020 2.7% 1.7%
Synovus Financial Corp (SNV) 10/20/2020 0.7% -0.9%
Truist Financial Corp (TFC) 10/15/2020 0.1% -3.2%
U.S. Bancorp (UBS) 10/14/2020 -0.7% -0.2%
Wells Fargo & Co (WFC) 10/14/2020 0.5% -4.0%
Western Alliance Bancorp (WAL) 10/22/2020 -0.7% 1.9%
Aggregate 1.1% 0.9%

Across the board investment banking revenue was low, but much stronger than expected. Banks have built provisions for large future loan losses, but so far they haven’t materialized. Investment banks typically have a natural balance built into their business model- when credit quality becomes a problem, heightened financial market volatility can lead to higher trading profits. Getting the exact balance right isn’t easy, but so far banks have done well in a volatile market.

Bank earnings and  global macro

Going forward three main factors will drive bank earnings: (1) Covid-19 (2) Monetary and fiscal stimulus and (3) Economic recovery. Goldman Sachs earnings presentation had a useful guide to the macroeconomic environment in which bank operate and function as a barometer:

Bank Earnings Macro

Asset Management Future

One other theme emerged from bank earnings. Investment banks are increasingly looking to asset management as a growth driver. The latest example is Morgan Stanley’s plan to buy Eaton Vance. Also notable Morgan Stanley completed its acquisition of E-Trade Financial. These acquisitions are leading to much higher AUM, making future asset management revenue a more important part of the overall mix. Goldman Sachs has been following a similar path. Earlier this year, Goldman Sachs started reporting Consumer and Wealth Management as a separate segment, reflecting its increasing importance. In 2019 Goldman Sachs acquired United Capital, an RIA that serves 22,000 clients in 90 plus offices across the US. Goldman Sachs also owns Ayco, a family office/ultra high net worth focused firm.