And JPMorgan and Wells Fargo record steep Q1 profit declines.
The coronavirus pandemic could spur “a new wave of consolidation” amongst global investment banks, according to an Oliver Wyman and Morgan Stanley report.
Some banks may find their lack of scale and the short-term pressure “too acute” to survive the crisis, particularly in Europe where returns are lower compared to bigger, more profitable global banking rivals.
Any potential consolidation comes at a time when all global investment bank earnings are under severe pressure because of the virus. Analysis in the report shows that even in a “rapid rebound” recession, lasting up to six months, there could be a 100% decline in earnings this year.
The profitability of banks in the European Union is still under threat despite having strong capital to withstand the pandemic, according to the European Banking Authority.
Core capital buffers rose to 14.8% of risk-weighted assets in Q4 2019 from 14.4% in Q3, the regulator said, but return on equity fell 80bp in Q4 to 5.8%, well below the average cost of equity.
“The COVID-19 pandemic has led to supply and demand shocks that are expected to weigh on economic growth and further add to substantial bank profitability challenges,” EBA said.
Both JPMorgan and Wells Fargo posted major Q1 profit declines mainly due to reserves for future loan losses, as executives warned the worst is yet to come.
Shares of Wells Fargo were down 4.3% in afternoon trading, whilst JPMorgan’s were down 3.4% and its quarterly profit plunged 69%.
Wells Fargo eked out just a penny per share in profit as it set aside $3.1b for future loan-losses, took a $950m hit on its investment portfolio and saw revenue fall 9% to 19% in its three business divisions.
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