Analysts and traders have been struggling to find an answer – or at least a reasonable guess – ahead of quarterly results from JPMorgan, Bank of America, Wells Fargo, and Citigroup the following week.
Wall Street predictions have changed dramatically from a month ago. Then, analysts called for large bank earnings per share to rise within the first quarter from a year earlier by a mean of 2%. Now they see declines starting from 14% to 42%, based on Refinitiv data.
That isn’t because the influence of the global pandemic is altering and hard to quantify, but also due to a new accounting standard that orders banks to foretell losses for the lifetime of loans and keep aside money now to cover them.
Those estimates need to be proved to regulators and auditors and be credible to traders. However, they ultimately depend on judgment: a pessimistic management group could determine to take much greater provisions than optimistic peers at a competitor bank, even when they’ve similar loan books.
To show the issue in guessing how that might play out, UBS bank analysts created a table exhibiting two outcomes for earnings per share: one with usual loss reserves, and another that was about one-third lower, based on their assumptions concerning the new rule.