This Is Not a Normal Recession': Banks Ready for Wave of Coronavirus Defaults
July 14 2020 - 2:29PM
Dow Jones News
By Ben Eisen and David Benoit
The largest U.S. banks signaled that the worst of the
coronavirus recession is yet to come, opting to stow away tens of
billions of dollars to prepare for an expected wave of loan
losses.
JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo &
Co. said Tuesday they took large hits to their second-quarter
profits to collectively stockpile $28 billion to cover losses as
consumers and businesses start to default on their loans.
The provisions amount to a sharp increase above what they put
away in the first three months of the year, reflecting a shift in
their assumptions about the length and severity of the pandemic's
economic toll. JPMorgan, the largest U.S. bank by assets, said it
put aside extra to prepare for an unemployment rate that remains at
double digits well into next year and a slower recovery in gross
domestic product than the bank's economists assumed three months
ago.
"This is not a normal recession," said James Dimon, JPMorgan's
chief executive. "The recessionary part of this you're going to see
down the road."
For years after the last financial crisis, banks made big
profits lending to consumers and companies eager to take advantage
of low interest rates. Heading into the current collapse, Americans
had taken on record amounts of auto loans, credit-card debt and
student loans. Corporate debt also reached record levels.
After governments shut down a host of businesses to slow the
spread of coronavirus, the outlook for that debt grew murkier. Bank
executives said Tuesday they saw signs of a nascent economic
recovery in May after states opened up. Now, a new spike in
coronavirus cases that caused a wave of shutdowns has them
preparing for an extended downturn.
"The pandemic has a grip on the economy, and it doesn't seem
likely to loosen until vaccines are widely available," Citigroup
Chief Executive Michael Corbat said.
JPMorgan set aside $10.47 billion to cover potential loan
losses, cutting its profit in half. Wells Fargo posted its first
quarterly loss in more than a decade and socked away $9.57 billion
to prepare for a wave of loan defaults. Citigroup's profit fell
73%, weighed down by the $7.9 billion the bank set aside for an
expected increase in soured loans.
Shares of JPMorgan were flat midday. Citigroup shares fell about
2%, and Wells Fargo shares fell around 5%.
Goldman Sachs Group Inc., Morgan Stanley and Bank of America
Corp. will report earnings later this week.
The economic collapse has been unusual in that banks have
granted temporary pauses on payments for mortgages, auto loans and
commercial loans. Also, the federal government has provided
unprecedented stimulus to keep consumers afloat.
Executives said Tuesday the requests for more assistance have
tailed off in recent months. Credit-card customers who had
requested help were largely returning to paying instead of seeking
more relief.
"It does appear the relief programs are working" Citigroup Chief
Financial Officer Mark Mason told reporters.
But as relief measures roll off, banks are expecting trouble
ahead.
All three banks added to their loan-loss reserves for both their
commercial divisions and their consumer banks. All told, the three
banks have stockpiled $83 billion for credit losses. Hard-hit
industries like retail and hotels are already struggling
financially, but executives said they now expect the downturn to
hit a wide range of businesses.
"May and June will prove to be the easy months in terms of this
recovery, " said Jennifer Piepszak, JPMorgan's CFO. "Now we're
really hitting the moment of truth in the months ahead."
Additionally, banks expect higher losses in consumer mortgages
when payment deferrals end and higher credit-card losses due to
elevated unemployment.
Even as the recession deepened in the second quarter, the
S&P 500 rose 20%. In a sign of that rift, banks reported some
of their best trading results in years. Trading revenue rose 79% at
JPMorgan and 55% at Citigroup. Both banks did brisk business
advising companies raising funds through debt and equity sales.
Executives at JPMorgan and Citigroup cautioned that
second-quarter market revenues were abnormally high and trading
likely would fall back to earth in the second half of the year.
So far, the pandemic has hit Wells Fargo the hardest. The bank,
already struggling to dig out of a four-year-old fake-accounts
scandal, had to manage the economic fallout while staying within
strict regulatory confines. In addition to increasing its loan-loss
provisions, it noted a recent rise in charge-offs tied to its
oil-and-gas and commercial-real-estate portfolios.
"Our view of the length and severity of the economic downturn
has deteriorated considerably," said CEO Charles Scharf.
Write to Ben Eisen at ben.eisen@wsj.com and David Benoit at
david.benoit@wsj.com
(END) Dow Jones Newswires
July 14, 2020 14:14 ET (18:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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