The major banks in the US anticipate a spate of loan defaults as households and business customers suffer a major financial blow from the coronavirus pandemic.
JPMorgan Chase, Wells Fargo, Bank of America, Citigroup and Goldman Sachs combined raised nearly $ 20 billion in bad loans in the first quarter, earnings reports released the past two days show. And Wall Street expects that number could be even higher in the next quarter, a possibility bank executives admitted on conference calls on the results.
Bank of America and Citigroup announced on Wednesday that their first-quarter earnings were down more than 40% as both reserved billions for potentially bad loans. A day earlier, JPMorgan Chase and Wells Fargo reported even greater declines in profits as these banks also set aside large sums to cover credit losses.
Investment banks were not immune to the pandemic. Goldman Sachs’ earnings for the first quarter were 46% year-over-year due to significant losses on its own investments as well as building reserves for potential loan defaults.
The coronavirus outbreak virtually brought the US economy to a standstill in just a few weeks. Most economists – and bank CEOs – expect the US to go through a depression. The only question is how much the gross domestic product should drop by 30 to 40% in the second quarter and how much the unemployment rate should rise to up to 25%.
On Tuesday, Jamie Dimon, CEO of JPMorgan Chase, said the bank was preparing for a “severe recession”. Charlie Scharf, Wells Fargo CEO, said, “We all know we’ve never seen anything like this before.”
One signal of how quickly consumers are pulling out was the latest government retail sales data. Retail sales declined 8.7% in March, the largest monthly decline for this data point on record. Consumer spending accounts for about 70% of US gross domestic product, so such a decline is particularly problematic.
Bank of America’s own data showed that consumers withdrew dramatically. Until the beginning of March, BofA spending on credit and debit cards had a constant annual growth rate of 7.5%. That’s pretty normal for the industry. By the beginning of April this had fallen to around 2%.
Many of the now-at-risk loans were fine weeks ago, but the pandemic has closed businesses and left millions unemployed.
Banks have made efforts to develop payment options for their now distressed customers, including lowering fees, reducing monthly payments, and allowing borrowers to skip a monthly payment. About one in six small businesses that have loans with Bank of America are now in some sort of deferral program, the bank said on Wednesday.
On Wednesday, the BofA said it had quintupled its loan loss provisions to $ 4.76 billion, while Citi had set aside $ 7.03 billion, up from $ 1.98 billion in the first quarter of last year. Both have major credit card stores. BofA also has a large retail banking business while Citi has a large international banking business and reputable company companies around the world.
BofA and Citi outperformed rivals JPMorgan and Wells Fargo, both of which saw sharper profit declines and proportionally more money set aside to cover credit losses. Wall Street, however, expects the industry to further increase its bad debt cushion.
“At the moment, these are all assumptions,” said Octavio Marenzi of the consulting firm Opimas in an email to the investors. “The credit risk models created by banks have never seen anything like this and are unlikely to be able to make accurate predictions. If anything, it looks like BofA’s loss provision is on the light side and we expect higher provision for loan losses in the second quarter. “
Speaking on a conference call with investors, BofA CEO Brian Moynihan said Wednesday’s numbers were preliminary and that the bank would put more money aside over the next quarter if needed.
Charlotte, NC-based BofA posted earnings of $ 4.01 billion, or 40 cents per share, compared to $ 7.31 billion, or 70 cents per share, the previous year. Citi’s earnings fell to $ 2.5 billion, or $ 1.05 per share, from $ 4.7 billion or $ 1.87 per share last year.
Goldman Sachs had to set aside $ 937 million to cover potentially non-performing loans, up from $ 224 million the previous year. But Goldman had the biggest hit in their own portfolio. The investment bank has stakes in several large publicly traded companies as well as its own private equity portfolio. Many of these companies saw their stocks plummet last quarter as the stock market ended its 11-year bull run, so Goldman had to record those losses on its balance sheet.