The potential cost of bad debt loans from the coronavirus for the country’s largest banks has reached 12 figures.
The country’s five largest lenders – Bank of America, Citigroup, JPMorgan Chase, US Bancorp, and Wells Fargo – say the financial stress caused by the pandemic could cause borrowers to default a total of $ 104 billion in debt. The revelations came as part of the largest banks’ quarterly earnings announcements this week.
Profits plummeted at all five banks, largely because they had to set aside money to cover bad loans. Bank of America It was the last bank to report earnings for the second quarter. Earnings before taxes fell nearly 60%, Bank of America said Thursday. The bank added $ 5 billion to its bad debt provision, which doubled to almost $ 20 billion from $ 10 billion last year.
It is the first time that potential credit losses have crossed $ 100 billion for the five largest banks since the end of 2010, and is another sign of the country’s growing economic woes.
“It’s big,” said Octavio Marenzi, CEO of financial industry consultancy Opimas. “These banks are increasing reserves like never before.”
Banks always forecast that some percentage of their loans will default and then they will set aside money to cover those losses. But in the past six months, expected credit losses have skyrocketed at the largest banks.
For example, JPMorgan Chase predicts that the bank may have to cover $ 32.1 billion in bad loans. That’s almost triple the $ 13.2 billion the bank was predicting a year ago.
Huge loss predictions suggest that many consumers will experience significant financial difficulties as a result of the coronavirus slowdown, even after many banks have allowed customers temporarily delay many loan payments.
Nearly $ 18 billion of JPMorgan’s expected loan losses, for example, or about 55%, come from its credit card segment.
Matt Anderson, an analyst at credit data firm Trepp, said the reason for the big jump in expected credit losses was the high unemployment rate and weakening economic activity. And he predicted that credit losses could continue to increase.
“Ultimately, more loss provisioning may be needed to cope with the coronavirus recession,” Anderson wrote in a note to clients on Friday.
The good news is that expected credit losses are still lower than they were in 2010, when bad loan provisions at the five largest banks reached $ 150 billion. They also remain a fraction of the bank’s general loan portfolios of approximately $ 4 trillion.
Marenzi suspects that bank loan loss predictions are off, given how different the current coronavirus recession is from previous recessions. Banks predict credit losses based on unemployment rates, Marenzi said. But unemployment rates, which skyrocketed, have been fueled by the fact that the government is offering more unemployment insurance to a broader segment of the population than in past recessions. Stimulus controls can also prevent individuals from defaulting.
“I guess the numbers are higher than they will end up being,” Marenzi said. “[But] if the banks are right, this recession will end up being very bad for people. ”
.
