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Bank CEOs brace for worsening economic scenario

Wells Fargo swung to its first loss since the financial crisis — while JPMorgan Chase and Citigroup reported significantly lower profits from a year earlier — as the banks set aside billions of dollars more in the second quarterfor loans that may go bad.

Why it matters: The cumulative $28 billion in loan loss provisions that banks have so far announced they’re reserving serves as a signal they’re preparing for a colossal wave of loan defaults as the economy slogs through a coronavirus-driven downturn.

The big picture: Quarterly results from the big banks are trickling out this week. So far, a trend has emerged: Their earnings areclipped as they buffer credit loss reserves, but those earnings are offset by stock-and-bond trading divisions that are thriving amid feverish market activity.

  • That’s not the case for Wells Fargo, which doesn't have the same exposure to the booming stock market. Itreported a loss of $2.4 billion.
  • What they’re saying: “Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter,” Wells Fargo CEO Charlie Scharf said in a press release.

Between the lines: Wells Fargo allocated $9.6 billion for potential loan losses — more than double what it put aside in the first quarter as the economy started to show signs of strain from the coronavirus-imposed lockdowns.

  • JPMorgan set aside another $10 billion, after putting reserving roughly $8 billion in the first quarter.
  • Citi put aside $8 billion, after the $7 billion it allocated in Q1.

By the numbers: At JPMorgan, the country’s biggest bank, profits fell 51% from a year earlier to $4.7 billion — dragged down by what it set aside to cover future loan losses.

  • Profits at Citi fell 73% from a year earlier — to $1.3 billionalso crimped by how much it set aside for loans possiblygoing bad.
  • JPMorgan’s corporate and investment bank — which includes its trading division — saw record revenue, while Citi’s trading division saw revenues rise 55% from a year earlier.

The bottom line: “We still face much un­cer­tainty re­garding the fu­ture path of the econ­omy,” despite some positive economic data and government action, JPMorgan CEO Jamie Dimon said in a press release.

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