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Worried about the economy? Watch bank earnings

1. Bank earnings: As the global economic outlook darkens, American banks have an unenviable...

Posted: Jan 14, 2019 3:57 PM
Updated: Jan 14, 2019 3:58 PM

1. Bank earnings: As the global economic outlook darkens, American banks have an unenviable job: Convincing a jittery public that the US economy remains strong and can keep growing.

Concerns about whether the economy can continue expanding have gripped investors in recent weeks, and spurred erratic swings in global markets. Such fears threaten to weigh on banks this year, because their performance is closely tied to the health of the economy.

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Bank profits suffer when the economy stumbles and businesses are scared to borrow. They become especially vulnerable when a recession hits and some customers aren't able to pay back loans.

Whether a recession looms will be a key topic of discussion this week, when JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) report earnings from the final three months of 2018. (Update: Citi reported earnings that topped forecasts, but its revenues were lower than what Wall Street was expecting.)

Wall Street executives almost certainly will be asked to prognosticate about the state of the economy — and what it could mean for businesses if growth falters after a lengthy run.

"We're in a mature stage of economic growth in the US," said Fred Cannon, director of research at Keefe, Bruyette & Woods. "It's hard to find a real expansion area [for banks] right now."

Last year, bank stocks diverged from the actual business performance.

Banks brought in record profits, according to data from the Federal Deposit Insurance Corporation. In the third quarter of 2018, FDIC-insured banks reported $62 billion in profit, an all-time high and up nearly 30% compared to the previous year. Both President Donald Trump's corporate tax cuts and the buzzing economy played a role.

But bank shares sagged, trailing the market amid apprehension about what could be coming down the pike. The financial sector (XLF) fell almost 15% in 2018. Comparatively, the Dow fell 5.6%, and the S&P 500 was down 6.2%. JPMorgan Chase, a top performer, dropped about 9% last year.

One reason for worry has been the shrinking difference between short-term and long-term bond yields. Before almost every recent recession, the so-called yield curve has inverted, meaning short-term rates are higher than long-term ones. That indicates investors are not enthusiastic about long-term growth.

The flattening yield curve affects the income banks collect from lending, since banks pay interest on short-term rates and lend at long-term rates. They make money off the difference.

When the banks report this week, Wall Street will likely pay close attention to consumer and business loans. Analysts predict solid loan growth for last quarter. But the segments will be keenly monitored as barometers of economic health.

Steve Biggar, an analyst at Argus Research, noted in a December memo that loan growth has been increasingly "sluggish" as interest rates have gone up, particularly for auto loans and home loans. Businesses have also cut back on borrowing, he said.

"We don't see another surge in commercial real estate that would encourage a lot of borrowing," Cannon said. "We see concerns about leveraged lending, which is an area that has grown rapidly." Businesses already have high debt loads, he added.

Last quarter's market volatility could also lead to questions about the pace of mergers and acquisitions and public offerings. Activity in the capital markets can dwindle when they're choppy, which causes banks to lose out on advisory fees. Banks' asset management divisions are also sensitive to market behavior.

While there's plenty of reason to scrutinize bank performance, market watchers aren't exactly worried about their survival.

Regulators have gone to great lengths since the 2008 financial crisis to ensure banks would be on solid footing in the event of another recession. They now mandate that banks maintain certain levels of liquid assets, which can be easily converted to cash to pay off obligations.

Since the financial crisis, liquid assets in the banking system have increased by more than $3 trillion, according to a November report from the Federal Reserve Board of Governors. Banks have also maintained solid capital levels to cushion any losses, and have largely tried to avoid the sort of risky lending that got them in trouble before.

"You don't see the excesses in lending on bank balance sheets that you saw going into the last recession," Cannon said.

2. Germany GDP: The German economy is in trouble, and economists are worried Germany may be entering a recession.

On Tuesday, Germany's statistics office will release its preliminary estimate of fourth-quarter GDP. Recent economic indicators suggest the number won't be pretty: German industrial production fell in November, the worst decline since 2009.

Economists typically consider a recession to begin after two consecutive quarters of shrinking economic output. The German economy shrunk 0.2% in the third quarter, so this would mark the second straight quarter of economic declines.

3. Shutdown slowdown: The stock market has mostly ignored the partial US government shutdown. The economic impact of a multi-week shutdown so far has been minimal, though it's certainly been painful for hundreds of thousands of government employees who aren't receiving their paychecks.

Yet the shutdown could start to drag down the economy if it continues. Credit rating agency Standard & Poor's said Friday that the US economy has already lost $3.6 billion and it will lop $1.2 billion off US GDP for every week the shutdown drags on.

Eventually, indirect economic harm could pile up: People will cancel vacations to parks and museums, and government contractors may have to lay off employees. If the shutdown continues, it could have a real impact on first-quarter GDP.

4. Airlines: Delta Air Lines (DAL) and United Continental Holdings (UAL) will report earnings on Tuesday.

Last Thursday, American Airlines (AAL) warned investors that the end of last year wasn't as good as it hoped. A week earlier, Delta cut its guidance on fourth-quarter fare revenue.

Lower-than-expected fuel prices have helped boost airline profits, but that wasn't enough to satisfy investors who are worried about a slowing global economy.

5. Detroit Auto Show: The United States' preeminent auto show will announce its 2019 Car, Truck and SUV of the Year award Monday.

Ford (F) and Volkswagen are also expected to formalize their widely expected partnership at the show on Tuesday. Ford has said it plans to spend $11 billion on new technologies and reshaping the focus of the company in the next three to five years. Finding someone to share those kinds of costs with will be crucial to its success.

6. Coming this week:

Monday — Citigroup earnings

Tuesday — JPMorgan, Wells Fargo, Delta and United earnings

Wednesday — Goldman Sachs, Bank of America and BlackRock (BLK) earnings

Thursday — American Express (AXP) and Netflix (NFLX) report earnings

Minnesota Coronavirus Cases

Data is updated nightly.

Cases: 485655

Reported Deaths: 6558
CountyCasesDeaths
Hennepin1007641586
Ramsey43106801
Dakota36297390
Anoka33293385
Washington22078256
Stearns18734201
St. Louis14805262
Scott13290107
Wright12526115
Olmsted1178988
Sherburne872872
Carver772640
Clay691587
Rice670491
Blue Earth594735
Kandiyohi579574
Crow Wing520681
Chisago499045
Otter Tail482170
Benton446490
Winona418349
Mower404731
Douglas392668
Nobles387047
Goodhue385768
Polk343162
McLeod339349
Beltrami337951
Morrison324547
Itasca313046
Lyon313044
Becker311342
Isanti306154
Steele300411
Carlton300149
Pine282016
Freeborn280723
Nicollet258641
Todd248030
Brown245037
Le Sueur235320
Mille Lacs227447
Cass220024
Waseca208717
Meeker207434
Martin189528
Wabasha18653
Roseau180217
Hubbard160640
Houston157314
Dodge15224
Renville149640
Redwood147027
Fillmore13728
Chippewa136335
Cottonwood134820
Pennington134416
Wadena130920
Faribault123017
Aitkin118833
Sibley117310
Watonwan11738
Rock115714
Kanabec107519
Pipestone101424
Yellow Medicine97617
Murray9448
Jackson93510
Swift87918
Pope8045
Marshall77815
Stevens7418
Lake74018
Clearwater71914
Lac qui Parle68416
Wilkin67110
Koochiching61811
Big Stone5163
Lincoln5062
Grant4918
Norman4788
Unassigned46768
Mahnomen4417
Kittson40921
Red Lake3625
Traverse3055
Lake of the Woods2191
Cook1180

Iowa Coronavirus Cases

Data is updated nightly.

Cases: 362827

Reported Deaths: 5440
CountyCasesDeaths
Polk58260551
Linn20670313
Scott18318210
Black Hawk16258292
Woodbury14979211
Johnson1384874
Dubuque13562194
Dallas1138690
Pottawattamie10791143
Story1024945
Warren556674
Clinton543784
Cerro Gordo533782
Webster519587
Marshall497272
Sioux494869
Buena Vista474537
Des Moines458861
Muscatine452291
Wapello4345108
Jasper417766
Plymouth395378
Lee375452
Marion359169
Jones294154
Henry293337
Carroll286249
Bremer280854
Crawford275135
Boone259730
Washington254347
Benton253854
Mahaska224746
Jackson221638
Dickinson217840
Tama213765
Kossuth208555
Clay193625
Hamilton192142
Delaware189140
Winneshiek189127
Buchanan185729
Fayette185235
Page183319
Hardin181439
Wright179931
Harrison179469
Cedar178523
Clayton168154
Butler167231
Mills163020
Floyd162741
Cherokee154836
Madison154718
Poweshiek154330
Hancock147130
Allamakee146747
Lyon145941
Iowa145023
Appanoose139247
Grundy139230
Jefferson138734
Winnebago138631
Cass134751
Calhoun133811
Mitchell130940
Louisa128241
Union126631
Chickasaw125215
Sac124618
Emmet121740
Shelby121733
Franklin118319
Humboldt117925
Guthrie116628
Palo Alto105221
Montgomery104136
Howard102921
Clarke100420
Unassigned9900
Keokuk98229
Monroe93328
Adair92128
Ida91432
Pocahontas85419
Davis83123
Monona81627
Greene77510
Lucas74021
Osceola70615
Worth6997
Taylor66612
Fremont5909
Decatur5829
Van Buren56118
Ringgold52320
Wayne48921
Audubon4889
Adams3274
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