Bank CEOs brace for worsening economic scenario
- Courtenay Brown, author of Axios Macro
JPMorgan CEO Jamie Dimon. Photo: J. Lawler Duggan/For The Washington Post via Getty Images
Wells Fargo swung to its first loss since the financial crisis — while JPMorgan Chase and Citigroup reported significantly lower profits from a year earlier — as the banks set aside billions of dollars more in the second quarter for loans that may go bad.
Why it matters: The cumulative $28 billion in loan loss provisions that banks have so far announced they’re reserving serves as a signal they’re preparing for a colossal wave of loan defaults as the economy slogs through a coronavirus-driven downturn.
The big picture: Quarterly results from the big banks are trickling out this week. So far, a trend has emerged: Their earnings are clipped as they buffer credit loss reserves, but those earnings are offset by stock-and-bond trading divisions that are thriving amid feverish market activity.
- That’s not the case for Wells Fargo, which doesn't have the same exposure to the booming stock market. It reported a loss of $2.4 billion.
- What they’re saying: “Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter,” Wells Fargo CEO Charlie Scharf said in a press release.
Between the lines: Wells Fargo allocated $9.6 billion for potential loan losses — more than double what it put aside in the first quarter as the economy started to show signs of strain from the coronavirus-imposed lockdowns.
- JPMorgan set aside another $10 billion, after putting reserving roughly $8 billion in the first quarter.
- Citi put aside $8 billion, after the $7 billion it allocated in Q1.
By the numbers: At JPMorgan, the country’s biggest bank, profits fell 51% from a year earlier — to $4.7 billion — dragged down by what it set aside to cover future loan losses.
- Profits at Citi fell 73% from a year earlier — to $1.3 billion — also crimped by how much it set aside for loans possibly going bad.
- JPMorgan’s trading arm saw record revenue, while Citi’s trading division saw revenues rise 55% from a year earlier.
The bottom line: “We still face much uncertainty regarding the future path of the economy,” despite some positive economic data and government action, JPMorgan CEO Jamie Dimon said in a press release.