Big banks keeping consumer loan losses in check, at least for now

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Call it the calm before the storm.

The first big banks to report quarterly results were able to keep net charge-offs within their consumer portfolios in check. They fell by 13% at Wells Fargo and 3% at Citigroup from a quarter earlier, while JPMorgan Chase had a 5% increase.

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.

It's hard to say how bad the situation will be.

“We are in a completely unpredictable environment,” Citigroup CEO Michael Corbat said during the $2.2 trillion-asset company’s quarterly call. “The pandemic has a grip on the economy, and it doesn't seem likely to loosen until vaccines are widely available.”

It “is not our intention to sound negative,” Corbat added. But “the unknowns outweigh the knowns.”

“Many don't see [normalization] coming until we feel like there's an antivirus vaccine that's available for the mass population," says Citigroup CEO Michael Corbat. "So the economy ... will continue to be hit.”
“Many don't see [normalization] coming until we feel like there's an antivirus vaccine that's available for the mass population," says Citigroup CEO Michael Corbat. "So the economy ... will continue to be hit.”

“The fact that we are deferring definitely pushes out what flows through the delinquency buckets into charge-offs,” John Shrewsberry, Wells Fargo’s chief financial officer, said during the $1.97 trillion-asset company’s call. “So the actual charge-offs will probably come later than they otherwise would.”

A generally pessimistic view of consumers’ ability to make their payments without support helped explain the large loan-loss provisions each company recorded in the second quarter.

“We feel we’re well covered for the scenarios that we're looking at,” Jennifer Piepszak, JPMorgan’s CFO, said during the $3.2 trillion-asset company’s call. She said it will be difficult to predict net charge-offs until delinquencies start to take place.

While forbearance requests declined from 60,000 a day in mid-April to 4,000 in late June, “we still have a good base of folks who are in deferral,” Shrewsberry said.

A recent spike in coronavirus cases in several states has created more uncertainty about when the economy may recover. Citi warned that nonperforming consumer loans may not peak until mid-2021.

Citi said it had provided assistance for about 2 million U.S. consumer credit card accounts, representing about 6% of overall balances. It has stepped in to assist roughly 5% of its mortgage customers, with relief tied to 7% of outstanding loans.

While the company earned $1.3 billion in the second quarter, its consumer division posted a loss after recording a $2 billion loan-loss provision.

Executives said more allowances and continued revenue pressure are likely. Any rebound would be contingent on virus containment and stronger consumer confidence in the ability of state governments to safely reopen their economies.

Total U.S. coronavirus cases topped 3.3 million by early Tuesday, while more than 12.9 million confirmed cases were recorded globally, according to Johns Hopkins University.

“Broadly in the world, we are somewhere between containment and stabilization,” Corbat said.

“Containment in that we can bend the curve in terms of the transmission of cases,” he added. “Stabilization is that, as we remove or start to take down some of the barriers or actions that were put in place … you actually don't see cases come back.”

Corbat had a grim assessment of the next phase, which he called normalization, where people feel comfortable boarding a plane, riding on the subway or attending a sporting event.

“I just don't see that coming,” he said. “And I would say many don't see that coming until we feel like there's an antivirus vaccine that's available for the mass population. … So the economy has been hit [and] will continue to be hit.”

Industry observers said they prefer the realistic stance bankers are taking.

“I think a bit of a pessimistic outlook is good because they are preparing for a future that really no one can predict,” said Lisa Kwasnowski, an analyst at Morningstar. “Conditions continue to evolve — every week feels like a year.”

“There remains significant uncertainty regarding how customers will perform once these relief efforts expire,” said David Feaster, an analyst at Raymond James.

Citigroup said 40% to 60% of consumers participating in relief programs in the U.S. and abroad are continuing to make payments, including half of those who have branded credit cards.

Governmental intervention, including stimulus checks and the Paycheck Protection Program, was helpful, but it also clouded Citi’s overall outlook, Corbat said. And it is unclear if there will be further federal support.

“What we're seeing is that the extraordinary actions of the Fed and the Treasury leave not just ours but industry models kind of wanting for more insight,” Corbat said. “We've never seen this type of action.”

Allissa Kline and Kevin Wack contributed to this report.

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Earnings Credit quality Consumer lending Citigroup JPMorgan Chase Wells Fargo Coronavirus