JPMorgan, Wells Fargo profits hit as they build reserves for bad loans

NEW YORK, USA – Earnings plunged at JPMorgan Chase and Wells Fargo on Tuesday, April 14, as both United States banking giants set aside billions of dollars to cover loans vulnerable to the economic devastation from coronavirus shutdowns.

Pointing to what chief executive Jamie Dimon called the “likelihood of a fairly severe recession,” JPMorgan booked reserves of nearly $8.3 billion, including a build of $6.8 billion in the 1st quarter. 

Wells Fargo announced a reserve build of $3.3 billion. Like their counterparts at JPMorgan, Wells Fargo executives signaled the number could rise further.

“If confidence does deteriorate and the shelters-in-place stay on for longer, it wouldn’t surprise me if the loss estimates would have to go up,” Wells Fargo chief executive Charlie Scharf told analysts on a conference call.

“There’s more downside than upside given the uncertainty in this environment.”

The reserves led to staggering drops in 1st quarter profits at both banks. Bank of America, Goldman Sachs, and other large banks report later this week.

Like other key US sectors, banks had enjoyed relatively prosperous conditions until government officials instituted a series of lockdown measures beginning in March to try to limit the spread of the coronavirus, shocking the economy and sending millions into unemployment.

Both banks are granting relief in the wake of downturn, with JPMorgan allowing a 90-day grace period on mortgage or credit card payments and Wells Fargo suspending property foreclosure sales.

But the reserves announced on Tuesday reflect the banks’ current assessment of where they could suffer defaults as the economy struggles to find its footing.

Eyeing 20% unemployment

JPMorgan chief financial officer Jennifer Piepszak said the projections are a best guess in a cloudy landscape due to the uncertain evolution of the virus and the unknowable potential lift from US stimulus programs.

“That’s absolutely the hardest thing to try to predict right now,” she said during a briefing with reporters, “the path of the virus and the path for the economy and when and how it reopens.”

JPMorgan’s economists currently project US unemployment will reach 20% in the 2nd quarter before recovering in the latter half of the year, Piepszak said.

Dimon hopes the economy can be ramped up soon, but told analysts, “It won’t be May. You talk about June, July, August, something like that.” 

The biggest US bank by assets, JPMorgan reported profits of $2.9 billion for the quarter ending March 31, down 69% from the year-ago period. Revenue dipped 3% to $28.3 billion.

Of the $6.8 billion JPMorgan set aside for credit losses, $4.4 billion is in its consumer business, primarily relating to credit cards. The other $2.4 billion ran across various businesses, with the biggest coming from oil and gas, retail, and real estate.

The provisions included $4.4 billion, primarily in its credit card business, and $2.4 billion across businesses, with the largest amounts in oil and gas, real estate, and retail.

The bank saw a big uptick in corporate clients accessing their lending facilities amid worries over liquidity. Piepszak said there has been a “pause” in this dynamic of late, but added that it could again see another surge.

Piepszak said the bank, which suspended share repurchases, still expects to maintain its dividend to shareholders, but added that the decision could be revisited if the economic outlook deteriorates further under a scenario where the US economy is closed for a longer period of time.

‘Long slow burn’

Wells Fargo, meanwhile, reported 1st quarter profits of $653 million, down 89% from the year-ago period. Revenues fell 18.2% to $5.8 billion.

Wells Fargo also saw a jump in commercial loans during the period, while also reporting an increase in nonperforming assets, citing in particular weakness in commercial real estate and commercial and industrial companies.

A bank presentation gave loan data on several sectors in which it had “escalated” monitoring for write-downs, including oil and gas, retail, entertainment and recreation, and transportation.

The bank expects the trough of the economy to be “quite elongated in terms of U shape,” said Wells Fargo chief financial officer John Shrewsberry, in contrast to talk of a “V-shaped” recovery where there is a quick rebound.

“We’re a little less relying on sharp spikes and sharp recoveries and thinking about this a little bit more as a long, slow burn over the next couple of years,” Shrewsberry said. 

Shares of JPMorgan slid 2.7% to $95.50, while Wells Fargo tumbled 4% to $30.18. – Rappler.com