NEW YORK (Reuters Breakingviews) - Remember when bank earnings were fairly predictable? Until recently, big lenders offered few surprises in their quarterly results, beyond the odd blip in trading results. The economic calamity caused by Covid-19 has upended this relatively cozy co-existence. Investors will need to be at peak intellectual fitness when the U.S. lenders start publishing their financials next week. Breakingviews offers some pointers.

JPMORGAN HAS SET A TEMPLATE

In his letter to shareholders earlier this week, boss Jamie Dimon gave a teaser on the effect of the pandemic on the mega-bank. He reckons a 34% drop in U.S. GDP this quarter and 14% unemployment by the end of the year would erode earnings and $17 billion of capital, but still leave the lender decently capitalized. And the dividend would still be intact.

That gets to a question that most U.S. banks will find themselves answering: what happens to the quarterly payout? For most of them, it’s only around a third of earnings anyway. Many European banks, for whom it’s a greater part of net income, have already cut their dividends.

Dimon also alluded to a bright spot that other banks may corroborate: JPMorgan had a record quarter for underwriting investment-grade debt.

THERE WILL BE FLASHBACKS TO 2008

That’s to say, investors need to start looking at balance sheets again. The global financial crisis meant they needed to know how much cash a bank had to deal with liquidity shortages, how many leveraged loans a bank might get stuck with, and how many hard-to-price investments, known as Level 3 assets the bank has. Chances are this bucket has grown since the end of the quarter.

There’s also the question of what happens if clients rush to draw down loans. Dimon in his shareholder missive said JPMorgan customers had already bagged $50 billion, almost a fifth of the amount by which the bank thinks its balance sheet would grow in a crisis. The big question is how much in total is each bank on the hook for, how much leeway do banks have to refuse to hand over the money – and how many requests to tap these credit lines they have already turned down.

THE FIRST QUARTER DOESN’T REALLY MATTER...

The big banks ended 2019 on a high in trading terms – Morgan Stanley doubled its fixed-income revenue, while JPMorgan’s grew 86% year-on-year. This time, only big anomalies relative to peers will deserve much notice. That’s because investors will be alert to any risk-management lapses that could wreak havoc as the coronavirus crisis continues. Many remember with a shudder Goldman Sachs’ former finance chief David Viniar blaming “25 standard deviations, several days in a row” for the implosion of several Goldman hedge funds in 2007.

...BUT CRISIS LENDING MATTERS A LOT

Banks are offering all manner of relief to retail and corporate clients. Interest and repayment holidays are common. Wells Fargo Chief Executive Charlie Scharf is one of those pledging not to report loans as overdue for 90 days. That’s the right thing to do for people struggling to pay, but how does it change how lenders account for these loans on their books? Does it mean bad loans will appear to stay low, then spike? And what effect does that have on capital?

Nor is it just a U.S question. Central banks and governments around the world have pledged trillions of dollars in a multitude of schemes to help keep people, companies and economies afloat during extended lockdowns. While there may be fees to be had from making crisis loans, there’s also the pressure to virtue-signal. Wells Fargo has already promised to give away any fees it makes, so as not to appear to profit from others’ distress. The habit may catch on.

IT’S A TIME FOR BEING FRUGAL

Bank costs – typically measured as a percentage of revenue in what’s known as the efficiency ratio – are always a focus. This time there’s an added urgency. How quickly can lenders slash expenses before having to let employees go? What are the sacred cows? JPMorgan, for example, was proud of not cutting its investment in new products, technology and the like during the last crisis.

There’s also the thorny question of executive pay. Sure, packages like Jamie Dimon’s $31 million, or Bank of America chief Brian Moynihan’s $27 million, are a drop in the bucket compared with their institutions’ overall costs. But when the economy is on its knees and unemployment is rocketing, generous packages look out of tune. British lenders HSBC and Standard Chartered have cut cash bonuses; some European bank bosses are giving chunks of their pay away. Selfless gestures now could pay dividends later.

CONTEXT NEWS

- Large U.S. banks begin to report their earnings for the first quarter of 2020 on April 14, starting with JPMorgan and Wells Fargo.

(Editing by John Foley and Amanda Gomez)

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