US banks prepare for wave of coronavirus defaults

Big US banks signalled the worst of the COVID recession is yet to come, putting away billions to prepare for a wave of loan losses.

JPMorgan Chase’s New York headfquarters. Picture: AFP

The largest US 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 and Wells Fargo & Co. said they took large hits to their second-quarter profits to collectively stockpile $US28 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 US 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.”

JPMorgan Chase's boss Jamie Dimon. Picture: AFP

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 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 $US10.47 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 $US9.57 billion to prepare for a wave of loan defaults. Citigroup’s profit fell 73 per cent, weighed down by the $US7.9 billion the bank set aside for an expected increase in soured loans.

Goldman Sachs, Morgan Stanley and Bank of America 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 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 $US83 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 per cent. In a sign of that rift, banks reported some of their best trading results in years. Trading revenue rose 79 per cent at JPMorgan and 55 pr cent 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.

Wall Street Journal