Banks can only guess at ultimate COVID-19 pandemic fallout

Two of the largest US banks have set aside billions to cover loan losses related to the coronavirus. That may be a rosy view.

JPMorgan has led a quarterly record amount of investment-grade corporate-debt issuance Picture: AP

Two of the largest US banks have set aside billions of dollars to cover loan losses related to the new coronavirus crisis. Unfortunately, that may only be enough under a rosy scenario.

For the first quarter, JPMorgan Chase added nearly $US7bn ($10.9bn) to its loss reserves, while Wells Fargo put aside almost $US3bn. These are extraordinary amounts, especially against the placid credit markets of the past several years. But as the banks acknowledge, it may not be reflective of what is coming down the road in more dire scenarios. That could be particularly the case for risks to corporate borrowers.

At JPMorgan, the bulk of the new provisions were for credit card loans, $US3.8bn out of the total $US6.8bn. That makes sense, given the fact that cards are unsecured by collateral, and with the unemployment rate — a primary driver of card losses — feared to jump to 10 per cent, if not double that, in the coming months, according to JPMorgan’s economists. Including other adjustments related to new accounting rules, overall allowances for loan losses now represent 9.7 per cent of retained credit card loans, up from 3.4 per cent at the end of last year.

JPMorgan also put aside an additional $US2.4bn for wholesale loans gone bad for the first quarter. But as a proportion of total loans, the allowance ratio moved in the opposite direction. Allowances for loan losses as a percentage of retained wholesale loans are now 0.87 per cent, down from 1.02 per cent at the end of last year. That is partly a result of the new loan-accounting standards, as well as the fact that corporate lending had an extraordinary growth surge in the first quarter.

But it also is a reminder that the risks to companies are more complex and may take longer to play out. In the first quarter, corporations made a historic grab for liquidity, which has for now put many on sounder footing. Companies drew down on $US50bn on credit lines at JPMorgan, and some at-risk companies were approved for $US25bn in new credit. JPMorgan also led a quarterly record amount of investment-grade corporate-debt issuance. Overall commercial and industrial lending grew 23 per cent from year-end. By contrast, consumers borrowed nearly 10 per cent less on their cards at JPMorgan over that time.

Both banks called out the oil-and-gas industry in particular as driving higher provisioning in the quarter. This sector is in trouble almost regardless of COVID-19, given where the price of oil is expected to be.

But the ultimate potential effects on airlines, hotels, retailers, commercial real estate and so forth are much more in flux. Ratings downgrades on swathes of borrowers picked up pace only late in the quarter, pushing much of the possible pain into the next quarter.

On Tuesday, JPMorgan chief financial officer Jennifer Piepszak repeatedly emphasised that the outlook was uncertain and that more provisions were highly possible in the coming quarters. Much would depend on the success of various government programs intended to keep consumers and small and large businesses afloat.

Wells Fargo also said the extent of losses would depend largely on the effectiveness of the stimulus measures.

JPMorgan said in its most extremely adverse scenario for how coronavirus played out, credit costs could hit $US45bn in total this year, just shy of the $US47bn increase following the 2008 global financial crisis. A sharper recovery could mean things stop short of that point. But an extended major downturn would mean the provisions taken by banks so far were only the beginning.