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Major US banks set aside billions of dollars in extra reserves for bad loans

15 Jul 2020 / 00:22 H.

NEW YORK: Large US banks have set aside billions of dollars in additional reserves for bad loans, according to earnings reports that underscored the weakening economic outlook due to the coronavirus pandemic.

Even amid gradual signs of a rebound as businesses reopen, the measures to contain Covid-19 have caused a devastating hit and millions of lost jobs in the world's largest economy. That has raised fears households will not be able to pay their home mortgages, car loans and credit card debts. And companies, too, have high debt levels.

JPMorgan Chase established another US$8.9 billion in reserves, more than the backstop in the first quarter, as it now expects a more "protracted" economic recovery in the second half of 2020 compared with its earlier outlook, chief financial officer Jennifer Piepszak said.

JPMorgan chief executive Jamie Dimon said that amid the uncertain outlook, the bank was "prepared for all eventualities as our fortress balance sheet allows us to remain a port in the storm."

The biggest reserves were added in consumer banking, mostly in credit cards.

The results come on the heels of actions by California, Texas and other states to halt or roll back the reopening of their economies due to a resurgence of Covid-19 cases.

Meanwhile, Citigroup added US$5.6 billion in reserves, "primarily reflecting the deterioration in Citi's view of the macroeconomic outlook," as well as downgrades in loan quality due to the hit from Covid-19, the bank said in a statement.

And Wells Fargo put another US$8.4 billion in reserves in the second quarter, pointing to the "unprecedented" nature of the pandemic.

Those increased reserves led to steep drops in profits at JPMorgan and Citigroup, although the banks benefited from improvements in some divisions, such as trading.

However, Wells Fargo reported a loss of US$2.4 billion, compared with US$6.2 billion in profits in the year-ago period. The bank said it was cutting its dividend to 10 cents a share from 51 cents.

Wells Fargo chief executive Charlie Scharf said the bank is "extremely disappointed" in the decision, but said, "Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter."

At JPMorgan, net income fell 51% to US$4.7 billion, translating into earnings-per-share that topped analyst forecasts. Revenues jumped 15% to US$33.8 billion, its highest ever for a quarter.

While the bank reported a loss in consumer and commercial banking, it garnered a big profit increase in its corporate and investment bank division. And the bank reported higher investment fees, while trading revenues soared amid volatility in financial markets.

JPMorgan saw improving economic conditions in May and June, but those were the "easy months" due to federal stimulus funds, Piepszak said, adding that the coming period would be "much more challenging."

The bank expects there will be more stimulus ahead, but that is not certain, Piepszak said in a conference call with reporters. The bank expects double-digit US unemployment to persist through the middle of 2021.

At Citigroup, net income fell 73% to US$1.3 billion, while revenues rose 5% to US$19.8 billion, boosted by higher revenues in its institutional clients group that offset a decline in consumer banking.

Shares of JPMorgan rose 1.4% to US$99.11 in premarket trading, while Citigroup fell 1.2% to US$51.60 and Wells Fargo slumped 6.0% to US$23.90. – AFP

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