First, the good news: America’s largest banks have had time to prepare for a wave of losses.
The bad news: They are still preparing to withstand a wave of losses. Its earnings this week suggest that the worst is yet to come for the American economy, and that Washington may need to provide even more support to workers and businesses.
Six of the largest lenders expect major credit defaults and impaired loans, as evidenced by their provisions for credit losses, which increased 43% of the already creepy totals in the first quarter to a combined total of $ 36 billion in the second quarter.
Provisions for credit losses are not, as it seems, a special pot of money set aside for when loans are due. It is more like the amount of money banks expect to lose on their loans; it shows the losses that your capital may have to absorb in the coming months and is subtracted from your earnings.
Approaching the moment of truth
For now, the terrible image is simply a forecast.
Four months after the blockades began to suffocate the world’s largest economy, bank losses have barely increased. JPMorgan Chase, for example, reports that cancellations in its consumer business have changed little from a year ago.
Meanwhile, banks with powerful trading desks benefited when stock prices spun and companies flooded the bond market with loans. JPMorgan said its markets unit had a record income of $ 9.7 billion, an increase of 79% since 2019. Morgan Stanley had record profits, while Goldman Sachs said its fixed income, currencies and commodities division had more than $ 4 billion in sales, its best quarter in nine years.
Large consumer lenders have yet to be mistreated for defaults and late payments due to a fierce wave of government support, which includes more than $ 2 trillion in aid to businesses and the unemployed, and because the banks themselves have offered patience and Loan Repayments Paid for Some of Its Clients Bank of America said it has handled about $ 30 billion in loan deferment requests since the crisis began, and that those requests have fallen 98% since reaching its peak in April.
“If you look at the banks, they are preparing for Armageddon and nothing is wrong yet,” says David Ellison, portfolio manager at Hennessy Funds. He is optimistic that lenders can overcome large credit losses (they got a lot of practice in 2009), but they will still have to deal with low interest rates, making their basic loan businesses less profitable. They also have to increasingly compete with private equity firms that often target the same business clients.
If the government disagrees with ways to continue supporting the economy as initial aid programs expire, “things could start to fall” for the banks, Ellison says. “And that’s where the banks say, ‘If that happens, I have to be prepared for it.'”
JPMorgan Chase added $ 6.8 billion to its credit reserves and is more pessimistic about the economic downturn than it was three months ago. He expects big losses in the coming months that will run until 2021. “May and June will prove to be easy bumps in terms of this recovery,” CFO Jennifer Piepszak said in a earnings call this week. “And now we are really reaching the moment of truth, I think, in the coming months.”
The Bank of America’s top executive expects the recession to last “until 2022.” In a earnings call today (July 16), CEO Brian Moynihan said the lender expects unemployment in the United States to end the year at 10% before gradually decreasing to 7.5% in 2021.
Wells Fargo, Citi
Not quite Everything is bleak. Wells Fargo CEO Charles Scharf said debit card spending returned to pre-Covid levels in May; In the last week of June, spending on debit cards increased 10% from the previous year. But spending on credit cards remained subdued, 10% lower in June than a year ago. Business card transactions were even weaker, 30% less during the last week of June, he said.
The Citigroup CEO believes the economy will only move forward until a vaccine is available. “The normalization for me is: Am I willing to get on the plane, am I willing to get on a subway, am I willing to go to a crowded place to see a sporting event or concert or whatever,” said the boss. Citigroup Michael Corbat said this week in an earnings call. “And I think realistically, when we get to that third cube, I just don’t see that coming. And I would say that many do not see it until we feel that there is an antivirus vaccine available for the mass population around that. “
Meanwhile, the carnage is expected to be widespread. According to Standard & Poor’s analysts, banks around the world are forecast to have more than $ 2 trillion in credit losses through 2021. About $ 1.3 trillion of those losses are anticipated to come this year, more than double the amount in 2019. .
“The unprecedented level of fiscal support that many governments around the world have deployed in response to the pandemic-related slowdown has been a key factor in supporting their citizens and economies during closing periods,” S&P analysts wrote. . “Perhaps the greatest danger at the moment is the reduction of such support too soon, resulting in a longer and deeper economic contraction.”
It is not clear that officials in Washington, who have already pledged billions of dollars, are ready to spend even more. Enhanced unemployment benefits have been a key element of the United States’ response to the crisis, by providing an additional $ 600 per week to qualified workers. That program will be phased out in late July unless politicians agree on a way to extend aid. The government also provided half a trillion dollars in loans through the Small Business Administration (SBA) to keep businesses afloat, a program that was developed on the fly and riddled with inefficiencies, but widely credited for helping keep the economy afloat.
Karen Mills, who headed the SBA during the Obama presidency, says more money is urgently needed for small businesses. She predicts that up to 30% of these small operators are at risk of closing their doors forever. “We know that there are already several companies at the limit,” he said. “The next tranche of government funding is critical.”
Critical to small businesses, to be sure. And also important for your banks.
