NEW YORK–Three of the largest banks in the U.S. reported they have set aside a whopping $28 billion for future loan losses that may occur as a result of the coronavirus pandemic.
The increased allowances led to big declines in profit by two of the nation’s largest banks, and a loss for the second quarter reported by Wells Fargo.
The banks indicated they are concerned borrowers have been propped up to date by trillions of dollars in government and bank assistance, cheap credit and loan forbearance programs, but as that goes away losses will spike.
“The consumers' incomes are up, savings are up and home prices are up," said JPMorgan Chase & Co CEO Jamie Dimon on a call with journalists, reported CNBC. "The recessionary part" will come later, he said.
JPMorgan and Citigroup Inc each reported huge second-quarter profit declines on Tuesday, while Wells Fargo & Co posted its first loss since 2008, CNBC said.
“Banks with big Wall Street businesses were able to offset their loan woes with huge gains in capital markets revenue, particularly trading. The rough results were almost entirely due to loan-loss provisions,” according to the report. “Executives warned that there is still a lot of guesswork involved. Under new accounting rules, lenders have to reserve for the entire life of a loan upfront. That would be tricky under normal circumstances, but when a deadly virus is hitting the economy in unpredictable waves, it is especially hard to say how long the downturn might last.”
Unemployment Forecast
JPMorgan said it is forecasting unemployment will remain in the double-digits through the first half of 2021, while Citigroup expects GDP to fall by more than 35% before recovering.
“The biggest lending concerns center on credit cards…” noted the report. “The business has not yet seen major upheaval. Although spending declined because of lockdowns, borrowers used stimulus checks to stay current or pay off debt.”
Citigroup, one of the biggest card lenders in the world, reported it saw delinquency and default rates decline in the second quarter.
Wells Fargo reported a net loss of $2.4 billion, or 66 cents per share, for the second quarter ended June 30, compared with a profit of $6.2 billion, or $1.30 per share, in the year-earlier period.
‘Extremely Disappointed’
Chief Executive Officer Charlie Scharf promised changes to improve the bank's performance and said while the hit from the pandemic was unprecedented, its franchise should perform better.
"We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter," Scharf said.
Wells Fargo set aside $9.57 billion in credit loss provisions, up from $503 million a year earlier.