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Last Tuesday, 13.07, three of the biggest banks in the United States—JPMorgan Chase & Co, Wells Fargo & Co and Citigroup Inc—set aside a grand total of $28 billion to prepare for potential defaults on loans expected to rain from both individual and corporate clients. According to Bloomberg, the last time such an amount of money was set aside to deal with bad loans was during the Great Recession of 2008.
Why this move was needed
By stockpiling cash, all three banks have effectively hurt their incomes for their respective fiscal quarters, with Wells Fargo even reporting its first quarterly loss since 2008. According to their CEOs, however, these crippling measures, though a bit puzzling to some, are absolutely crucial to protecting the institutions from even more harm further down the road. After all, it’s no secret that the world economy is staying afloat in times of pandemic largely thanks to the generous government aid programs that cushioned the economic blow for both employers and employees as cities, areas, and even whole nations shut down operations due to COVID-19.
This was especially the case in the U.S., where the nation provided Americans with $600 worth of weekly supplements to compensate for the record-high unemployment figures. In the coming months, however, these wells are expected to dry out, leaving many with no financial means to support themselves, let alone pay out loans. Banks have already caught wind of this trend, which is why some are currently saving up cash to cover for loan losses as an increasing number of people аre expected to file for bankruptcy due to no longer being able to keep up with their monthly payments.
“We’ll expect to gain more visibility of the damage that we’re dealing with over the coming months.”
Jennifer Piepszak, CFO at JPMorgan Chase
According to associate professor of economics at Harvard University Gabriel Chodorow-Reich, the main reason for banks to start saving money is that they are “pessimistic about the course of the recovery,” and “don’t see a rapid recovery over the next six months [happening but] a protracted recession [instead]”.
“This is not a normal recession”
If someone is saving up billions of dollars ahead of time, chances are they’re preparing for the worst economic scenario they can imagine. That is exactly what’s being observed here as well.
According to experts at JPMorgan, the unemployment rate in the U.S. is expected to remain in the double digits throughout the remainder of 2020. JPMorgan’s estimates of future loan losses are based on conservative assumptions featuring five possible scenarios, the bank explained, adding that it does not foresee the need for another savings round that could also risk eroding its future earnings. However, expectations are for expenses related to covering bad loans to increase.
According to Mark Mason, CFO of Citigroup, the bank has based its future loan forecast on a scenario that features an unemployment rate between 10% and 12% and a sharp contraction in the U.S. gross domestic product.
Wells Fargo, on the other hand, expects the unemployment rate to fall down to 10% this year and for the U.S. to accelerate its economic growth in the second half of the year, with house prices eventually stabilising and commercial real estate prices falling by 10% to 12%. According to its chief executive officer Charles W. Scharf, the bank’s views “on the length and severity of the downturn deteriorated substantially” over the past three months.
“This is not a normal recession. The recessionary part of this you’re going to see down the road.”
Jamie Dimon, CEO of JPMorgan Chase
JPMorgan’s financial performance
JPMorgan set aside nearly $11 billion for possible loan losses, reducing its profit by half, which translates to 51 fewer cents per shares on a year-on-year basis at profits of $4.7 billion. At the time of writing, the bank has a total of $34 billion in credit reserves, with $6 billion assigned to dealing with losses on loans taken by consumers, credit card payments included.
Still, JPMorgan did manage to increase its lending rate by 4% on an annual basis, while its deposits also saw a boost of 25%.
Citigroup’s financial performance
After setting aside $7.9 billion, Citigroup’s profits shrunk by 73 cents per share, or a quarterly revenue of $1.3 billion (a year-over-year net income decline of 73%). The bank’s Wall Street performance rose slightly compared to last year, though not as much as JPMorgan’s.
Wells Fargo’s financial performance
Wells Fargo, which doesn’t rely as much on Wall Street in terms of income, suffered a loss of $2.4 billion due to the spread of COVID-19. This comes as a stark contrast to the bank’s 2019 performance of $6.2 billion for the same fiscal quarter.
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