The second-quarter provisions bring the three banks’ 2020 total to $47 billion, more than those firms set aside in the last three years combined.
“I don’t think anybody should leave any bank earnings call this quarter simply feeling like the worst is absolutely behind us and it’s a rosy path ahead,” Citigroup CEO Michael Corbat told analysts. “We don’t want people leaving the call simply thinking the world is a great place and it’s a V-shaped recovery.”
The pessimism of banks’ forecasts stands in stark relief to the predictions coming out of Washington. The White House has touted a sharp economic bounce, and said it’s intact even as the virus surges again and threatens new waves of lockdowns.
“I don’t see an interruption to the V-shaped recovery,” White House economic adviser Larry Kudlow told Fox News on Monday. “If there is one, I’ll be honest and factful about it. But at the moment, with our fingers crossed and some prayers, I think we’re on track for a very strong second half of the year, probably still 20% growth plus.” The strains have yet to show on the consumer side. Citigroup’s non-accrual consumer loans fell 7% from a year earlier. JPMorgan’s total net charge-offs were almost half what was expected.
“The relationship between the business cycle and the health of the business sector and the health of the household sector is broken,” JPMorgan Chief Financial Officer Jennifer Piepszak said.
It’s particularly hard for banks and their investors to gauge the resiliency of consumers because so much depends on how the pandemic evolves and because the government has been providing them so much support and stimulus -- some of which is set to run out soon.
“What happens when we take the consumer off of life support?” said David Donovan, who leads the Americas global financial-services practice for Publicis Sapient, which helps set strategy for banks. As the disease ebbs in some areas and spikes in others including Florida, Texas and California, “it’s hard to get a handle on how that affects the overall consumer.”
Loans to companies already have started to sour.
Wells Fargo’s nonperforming assets jumped 22% from the first quarter, largely driven by loans to the oil and gas and commercial real estate industries. The bank boosted its reserve for credit losses by $8.4 billion in the period, with more than three-quarters of the increase coming on the commercial side. Citigroup said its roughly $3.5 billion boost to wholesale lending reserves was partly driven by a slew of credit-rating downgrades.
“There’s significantly more reserves against non-investment grade names,” Citigroup CFO Mark Mason said. “Within that non-investment grade bucket, we’ve seen a lot of further downgrades.”
Still, the banks’ provisions are more about future pain than anything in current results. New accounting rules have pushed lenders to do more forecasting and try to get ahead of losses before they appear. The three banks increased their reserves by $23 billion, $7 billion more than the previous record.
“We’re just guessing,” Dimon said. “We are prepared for the worst case. We simply don’t know.”
--With assistance from Payne Lubbers, Lananh Nguyen, Josh Wingrove and Steve Dickson.
This article was provided by Bloomberg News.