Big banks prepare for worsening economy; Fed officials offer different outlooks

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Goldman beats

Goldman Sachs reported flat earnings for the second quarter but that was “far better than expected. Quarterly revenue was the second-highest on record at $13.3 billion, a sign that Goldman—with a smaller lending footprint than giant commercial banks—has weathered this leg of the storm in better shape than rivals.” Wall Street Journal, Financial Times

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Is the worst yet to come?

The three large banks that were the first to report their second quarter earnings “signaled that the worst of the coronavirus recession is yet to come, opting to stow away tens of billions of dollars to prepare for an expected wave of loan losses,” the Wall Street Journal reported. JPMorgan Chase, Citigroup and Wells Fargo “took large hits to their second-quarter profits to collectively stockpile $28 billion to cover losses as consumers and businesses start to default on their loans.”

“The provisions amount to a sharp increase above what they put away in the first three months of the year, reflecting a shift in their assumptions about the length and severity of the pandemic’s economic toll. JPMorgan, the largest U.S. bank by assets, said it put aside extra to prepare for an unemployment rate that remains at double digits well into next year and a slower recovery in gross domestic product than the bank’s economists assumed three months ago.” Wall Street Journal, Financial Times, New York Times, Washington Post

JPMorgan Chase earnings: Wall Street Journal, Financial Times

Citi: Wall Street Journal, Financial Times

Wells Fargo: Wall Street Journal, Reuters

Two of the three banks – JPMorgan and Citi – “still earned a lot of money in the second quarter,” the Journal noted. But “that is less reassuring than investors might hope. Underlying the banks’ relative resilience in the second quarter were some arguably temporary benefits that don’t really address the long-term economic risks.”

“Bankers stressed that their provisioning [for future loan losses] remains highly subjective and they lack much visibility into the true health of consumers, the biggest source of credit risk. But the quarter provided little that should give investors marginal comfort on the more complex questions that will loom going forward. That includes whether the additional loan-loss reserves set aside in the second quarter represent the peak, and what banks’ earning power will look like in a stagnant economy at zero interest rates.”

The three banks “were able to keep net charge-offs within their consumer portfolios in check,” American Banker’s Jim Dobbs reports. “Still, executives at each company told analysts to expect the numbers to rise as the benefits from internal efforts, such as forbearance, and governmental stimulus begin to wear off.”

Mixed outlook

Federal Reserve governor Lael Brainard didn’t provide much in the way of optimism for the near-term economic future. “Difficulty suppressing the new coronavirus will pose substantial risks for the U.S. economy, including a possible double dip in economic activity,” she said, warning “that the nation faces a long, slow recovery even if those hazards are avoided.”

“The recent resurgence in Covid cases is a sober reminder that the pandemic remains the key driver of the economy’s course,” she said. “A thick fog of uncertainty still surrounds us, and downside risks predominate.”

But James Bullard, president of the St. Louis Fed, was a bit more hopeful, saying that “as the economy adapts to the coronavirus pandemic, a solid recovery and a substantial decline in what is now a very high unemployment rate are both possible.”

“The macroeconomic news for May and June, reported with a lag, seems to suggest that April will prove to be the lowest point of the crisis,” he told the Economic Club of New York. “He added that forecasts for the second quarter, which bore the brunt of the economic impact of the pandemic, are now less negative, and the job market has improved more quickly than expected.”

Financial Times

Tighter credit

In Europe, “banks plan to cut back on the flow of credit to eurozone businesses this summer because they anticipate that governments will wind down their loan guarantee schemes, according to a European Central Bank survey published on Tuesday. Lenders told the ECB in its quarterly survey that they expected ‘a considerable net tightening of credit standards on loans to enterprises’ in the third quarter of 2020.”

“European governments have guaranteed hundreds of billions of euros in loans to struggling businesses since the coronavirus pandemic hit the continent’s economy, while central banks have flooded the banking system with ultra-cheap loans at negative rates to help boost the supply of credit. This fueled demand for loans from eurozone businesses, which hit a record high in the second quarter. But in the coming months lending could dry up for companies that are relying on bank funding to cope with the economic fallout from the coronavirus pandemic, the ECB found — a scenario that could deal a fresh blow to jobs and growth in the second half of this year.”

Washington Post

Don’t worry

“New mortgage delinquencies hit a record in April, well above anything seen during the Great Recession.” But that doesn’t mean a second housing crisis looms, the Post reports.

“Like so many things right now, the future of the housing market ultimately depends on how quickly the novel coronavirus can be contained and whether the government’s stimulus programs will be extended as the pandemic drags on.”

Elsewhere

Windfall

“Banks will make out with $18 billion in fees for processing small business Paycheck Protection Program relief loans during the pandemic, according to calculations by Amanda Fischer, policy director at the Washington Center for Equitable Growth, a progressive economic think tank. For some banks, this money represents a hefty windfall. New Jersey-based Cross River Bank’s estimated $163 million haul would be more than double its net revenue last year. JPMorgan Chase could make $864 million.”

Quotable

We don’t know what the future is going to hold. This is not a normal recession.” — Jamie Dimon, CEO of JPMorgan Chase, which reported a record $10.5 billion loan-loss provisions in the second quarter, which led to a 51% drop in net income.

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