Higher Provisions for Loan Losses Are Lowering Earnings Growth for S&P 500 Banks for Q2

The Financials sector will be a sector in focus for the market this week, as 11 of the 17 companies in the S&P 500 that are scheduled to report earnings for Q2 during the week are in this sector. Most of these 11 companies are in the Banks industry, including Citigroup, JPMorgan Chase, and Wells Fargo. This industry is projected to report a year-over-year earnings decline of -26% for Q2. What is driving the expected decline in earnings for this industry?

Higher Provisions for Loan Losses

One factor contributing to the decline is that companies in the Banks industry are expected to report significantly higher provisions for loan losses in Q2 2022 relative to Q2 2021. Provisions for loan losses have no impact on top-line growth, but do have an impact on bottom-line growth, as they are treated like an expense on a company’s income statement.

Banks dramatically increased their provisions for loan losses in the first half of 2020 in conjunction with the economic lockdowns caused by COVID-19. Banks then substantially reduced their provisions for loan losses during 2021, with restrictions easing and economic conditions improving during the year. Banks are now increasing these provisions back to near pre-pandemic levels for 2022 (and going forward), but are facing difficult comparisons to the much lower (negative) numbers from 2021.

For example, JPMorgan Chase reported $10.5 billion in provisions for loan losses in Q2 2020 and -$2.3 billion in provisions for loan losses in Q2 2021. For Q2 2022, the estimated provision for loan losses is $1.0 billion.

Analyst Estimates Indicate Negative Impact on Earnings Growth

FactSet Estimates actively tracks this metric for all 18 companies in the Banks industry in the S&P 500. In aggregate, these 18 banks are projected to report $4.5 billion in provisions for loan losses in Q2 2022 compared to -$7.4 billion in Q2 2021. Based on current estimates, the Banks industry will likely continue to see a negative impact to earnings growth for the remainder of 2022 due to the year-over-year increase in provisions for loan losses for the remainder of 2022 compared to the remainder of 2021. However, the magnitude of the (year-over-year) difference is predicted to decline sequentially through the rest of the year.

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