Daily Management Review

US banks are losing profits due to rising defaults on loans


The first quarterly reports of US banks showed that the coronavirus pandemic, quarantine measures and the closure of enterprises significantly affected performance of financial companies. Bank profits fell sharply due to the fact that they are forced to allocate billions of dollars from reserves to cover credit losses.

Tony Webster
Tony Webster
On April 14, the first large banks began to publish quarterly reports in the United States. JPMorgan Chase and Wells Fargo, which are one of the largest retail banks in the country, reported on the results of their activities. Many analysts were waiting for their reporting, because they can tell about how the coronavirus epidemic, quarantine measures, closure of enterprises and the slowdown in economic activity affected the widest segments of the population, small and medium-sized businesses.

The presented reports turned out to be worse than even the most pessimistic forecasts, which is why JPMorgan Chase and Wells Fargo shares fell by 3% and 4%, respectively, after the publication of the results.

JPMorgan Chase reported that in the first quarter its revenue was $ 29.1 billion, which is only 3% lower than a year earlier. However, the bank’s profit fell 69% to $ 2.9 billion. The bank explained that the profit was adversely affected by the forced allocation of large reserves to cover loan losses.

In the first quarter, the bank allocated $ 8.3 billion to these reserves, which is $ 6.8 billion more than a year earlier. JPMorgan Chase allocated $ 4.4 billion to cover losses on consumer loans. Head of the bank, Jamie Dimon, said that “in the first quarter, the basic indicators of our operations were good, but adverse market conditions that increase the likelihood of a severe recession “made us allocate large reserves to cover credit losses.”

Wells Fargo’s profit fell even further in the first quarter - by 89%, to $ 653 million. The bank noted that it had to allocate $ 3.1 billion to reserves to cover credit losses, which “reflects the expected negative impact of unprecedented times in which our clients". In addition, Wells Fargo announced allocation of $ 950 million to write off the value of securities due to difficult economic and market conditions in the first quarter.

The negative results of JPMorgan and Wells Fargo resulted in a decrease in papers of their competitors, who will submit their reports in the coming days.

Citigroup shares fell 2.7%, Bank of America - 0.8%, Goldman Sachs - 0.5%. Investors fear that the epidemic will hit the results of the entire US banking sector and amid growing defaults on loans, which in 2008 led to a massive financial crisis.

source: bloomberg.com