Banks Brace for Loan Defaults; Economic Pain Ahead

Some of the biggest U.S. banks are putting their money where their fear is. JPMorgan Chase, Citigroup and Wells Fargo are bracing for a deteriorating economic outlook by adding a combined $28 billion to their reserves, the banking giants announced in second-quarter earnings calls.

The moves are aimed at bulking up defenses against consumer and corporate loan defaults. The firms are planning for the possibility that those credit losses pile up in the months ahead if the economy continues to be rocked by pandemic shutdowns and emergency relief from Washington dries up.

“We’re not seeing right now what you would typically expect to see, given a recession,” said Jennifer Piepszak, the CFO of JPMorgan Chase.  “May and June will prove to be the easy bumps in terms of its recovery. And now we’re really hitting the moment of truth … in the months ahead.”

As the economy tries to claw its way back, the trick for the country’s biggest banks will be to more than make up in Wall Street activities what it loses on Main Street loans. While JPMorgan Chase posted a profit for the second quarter, it was about half what it earned in the same period a year ago.  Wells Fargo and Citigroup did not fare as well. Both reported significant quarterly losses.

One warning signal is flashing red for the banks as they prepare for steeper loan losses: Home loan delinquencies hit a record high in April. Some 3.4% of Americans became at least 30 days delinquent on their mortgage in April, according to an analysis from CoreLogic.  While the housing market appears to be on much stronger footing than during the mortgage crisis, this could change if delinquencies rise and persist.

Losses on credit card debt present the more immediate threat to the big banks — followed by commercial and industrial loans and then those for commercial real estate, says Brian Kleinhanzl, a banking-sector analyst.

Big-bank chiefs are taking a notably grimmer view of the economic outlook than the White House.  White House economic adviser Larry Kudlow continues to project a V-shaped economic recovery, with 20% growth in the second half of this year.  But JPMorgan Chase now expects unemployment to remain in the double-digits through the first half of next year. “This is not a normal recession,” said chief executive Jamie Dimon.  “The recessionary part of this you’re going to see down the road.”

“We are in a completely unpredictable environment for which no models, no cycles to point to,” Citigroup chief executive Michael Corbat adds.  “The pandemic has a grip on the economy, and it doesn’t seem likely to loosen until vaccines are widely available.”

Source:  Washington Post