Big banks offer cautious optimism over economic recovery

Yahoo Finance's Brian Cheung joins Zack Guzman to break down the latest earnings reports from Goldman Sachs, Bank of America and Wells Fargo.

Video Transcript

ZACK GUZMAN: I want to bring on Yahoo Finance's bank reporter here and Brian Cheung for the latest to break down all those numbers. And Brian, a tale of two banks we have on our hands today.

BRIAN CHEUNG: Absolutely, and this is day two of the quarter three earnings season, and we did hear from the more consumer focused banks, Bank of America in addition to Wells Fargo, in contrast to the more investment banking type of businesses at JPMorgan Chase and Citigroup, which we heard from yesterday. The real big story is net interest income getting crushed at both companies, down 19% year over year at Wells Fargo, 17% year over year at Bank of America. Let's go over to San Francisco first. Wells Fargo earnings per share coming in at $0.42. That's a miss on estimates on the street of $0.45 adjusted revenue. It did beat, on the other hand, however $18.9 billion beating $18 billion of estimates. They got some help from their mortgage banking income, but expenses remain high as it tries to clean up its reputation, which we've explored at length on these programs.

Moving over back into the East Coast in Charlotte, North Carolina, Bank of America earnings per share coming in $0.51. That did slightly beat estimates of $0.50 adjusted on the street revenue coming in $20.3 billion. That missed on the top line the Street expected $20.8 billion. The real big story there, fixed income down 2% year over year in a quarter where the other banks really needed to lean on this revenue stream to make ends meet. JPMorgan Chase, by contrast, up 6% year over year in this field, and Citigroup up 18% year over year, so pretty poor performance from Bank of America over there.

And as you mentioned, Goldman Sachs the real winner of the day so far. They had a 29% jump in trading revenue. They beat handily the estimates on the top line $10.8 billion, beating the Street's estimates of $9.4 billion, adjusted earnings per share $9.68. Far higher than the estimates of $5.53. That's a big reason why Goldman Sachs shares are up 1.4% on a down day in the market, but that's the big summary right over there, Zack. I feel like Chris Berman Boomer ran off all of these earnings right now.

ZACK GUZMAN: Fastest three minutes we've ever seen in banking history there, Brian, but yes, no, when we talk about it, the other big numbers that stood out [? or ?] a lot of people were watching, we talked about this when JP Morgan reported as well, there's a loan loss provisions and all of those basically across the board. It looked like it came down by quite a bit, no matter which bank you look at from Q2 to Q3. But still setting aside close to $1 billion when you look at the banks, and talk to me about what that says about the risks still out there about what could happen in Q4 and how these banks are positioning for potential problems ahead in this recovery.

BRIAN CHEUNG: Yeah, absolutely. The big story for this bank earnings season is how much money did the large banks set aside for possible default or really failure to collect on loans, whether that's consumers, mortgages or for companies that they've lent to in this economy. As you'll recall in the second quarter, there were some eye popping provisions that the banks had set aside in preparation for whatever default wave might come as a result of this COVID crisis. What we did see was that this quarter, a lot of the large banks decreased the amount of provisions that they had set aside just for this quarter, but we have to keep in mind that those are provisions.

When you look at the total allowance for loan losses that they've accumulated over the past few quarters, they still remain quite elevated. So even though it is the case that Citigroup, JPMorgan Chase and Bank of America did decrease their allowance for loan losses, Wells Fargo was not able to do so because of the [? act ?] [? that ?] they face. They have some limitations on the amount that they can change their loan book, but it does remain to be seen whether or not the amount that they have is still enough if there were to be, for example, another double dip recession here if the cases get worse. That is reigning question in the next quarters to come.

ZACK GUZMAN: Yeah, and I mean, if you just think about the cushion that some of these banks have, and as large as they are, Wells Fargo said they had a $20.5 billion cushion here set aside for more credit losses in the quarter. 5.5% of those in Q2 largely driven by consumer mortgages. But when we talk about pain, whether it's just the consumer or just some of these other stresses we've been talking about across the country, it's still a lot of questions about where we go from here and a lot of cushion still at these banks. But Brian Cheung, appreciate you bringing us that.