Bank profits remain resilient despite ‘lingering’ pandemic
Group urges private lenders to join its initiative for debt suspension G20 suspends poor nations’ debt payments for 6 more months Wall St banks are on rebound after slumping 1H of the year
CHARLOTTE, North Carolina, Oct 15, (AP): Unemployment remains high, many small businesses are struggling, and there are few signs that Congress and the White House can soon agree on another stimulus package to help the US economy in the pandemic. But Wall Street banks are on the rebound after slumping the first six months of the year.
JPMorgan Chase, Citigroup, Wells Fargo and Bank of America saw their profits partly recover in the third quarter from the depths of the coronavirus-caused recession earlier this year. The turnaround stems mostly from improvements in the US economy that allowed these big banks to set aside less money to cover potentially bad loans - $5 billion in the third quarter versus $33 billion in the second quarter.
“It’s the same story at every bank in the industry right now: lower credit costs are helping restore profitability,” said Kyle Sanders, an analyst who covers the financial services industry for Edward Jones.
The health of the banking sector is a proxy for the US economy, since the banks’ balance sheets rise or fall depending on whether borrowers are repaying their debts. Trillions of dollars of stimulus and reopening economies have helped partly lift the US economy out of its historic contraction, which in turn has kept banks from having to write down or write off loans.
Losses
In the early months of the US pandemic, banks set aside tens of billions of dollars to cover losses that could come from loans that were suddenly going bad. Millions of Americans and store owners, who were reliable borrowers before the pandemic, now found themselves out of work or their businesses temporarily shuttered. Bank executives said in April that they were taking “everything but the kitchen sink” approach to these loans since they were unsure how long the pandemic was going to last.
In July, with signs the pandemic was worsening, banks threw in the kitchen sink. They set aside, yet again, tens of billions of dollars to cover additional potentially bad loans. Collectively the five biggest banks put aside $34.62 billion to cover bad loans just in the second quarter.
The banks have benefitted from massive government stimulus to keep the US economy afloat. The banks were the centerpiece of the Paycheck Protection Program, a $669 billion program that gave forgivable loans to small businesses to keep them paying their employees. Individual Americans got $1,200 stimulus check, which researchers have found were used to either pay off debts or shore up savings.
Further, Congress and financial regulators have allowed banks to offer payment forbearance to mortgage borrowers for up to a year without having to mark those loans as bad on their balance sheets.
On top of the stimulus, banks entered into this pandemic the healthiest they’ve been in years and certainly healthier than they were before the financial crisis of 2008. Capital levels were at historic highs, allowing banks to buy back stock and increase dividends as soon as they could to return excess capital to shareholders.
For the moment, banks either seem to think the worst is over or are holding off from booking additional losses until it becomes clear which way the economy is going. JPMorgan set aside $611 million to cover potentially bad loans in the third quarter, a fraction of the $10.47 billion the bank set aside to cover bad loans in the second quarter. On Wednesday, Bank of America said
it set aside $1.4 billion to cover potentially bad loans, far less than the $5.1 billion it set aside three months earlier.
But that doesn’t mean the financial troubles are over. Millions remain out of work and coronavirus outbreaks are increasing in geographies either previously not impacted by the pandemic or in places that were hit earlier this year. New York had a jump in cases in Brooklyn but was able to keep its positivity rate below 1%. Meanwhile Wisconsin, and other parts of the Midwest are dealing with record outbreaks.
Without a vaccine, it’s unclear where the US economy is headed. JPMorgan CEO Jamie Dimon told reporters Tuesday that if the economy keeps improving the bank could be
“over-reserved by $10 billion.” But if the economy slips back into recession, JPMorgan might need another $20 billion to cover bad loans.
Despite the banks posting better profits, investors have sold bank shares this week. The KBW Bank Index, which measures the value of the nation’s 24 largest banks, is down 4% in two days. Most of the worry seems to reflect investors’ uncertainty about whether banks will have to set aside additional billions in the future.
“Investors are still jittery about the banks,” Edward Jones’ Sanders said. “These government stimulus and forbearance programs are starting to end, and we know there will be actual losses in the future.”
WASHINGTON, Oct 15, (AP): The Group of 20 nations, representing the world’s biggest economies, agreed Wednesday to extend the suspension of debt payments by an additional six months to support the most vulnerable countries in their fight against the coronavirus pandemic.
The suspension of what the G-20 says could provide relief of $14 billion in debt payments had been due to expire at the end of the year. Wednesday’s decision gives developing nations until the end of June 2021 to focus spending on health care and emergency stimulus programs rather than debt repayments.
The G-20 announcement was made initially on Twitter during a meeting of the group’s finance ministers and central bank governors, and later confirmed at a news conference. The virtual discussions are being held at the start of this week’s meetings of the 189-nation International Monetary Fund and the World Bank, which are also being conducted virtually because of the coronavirus pandemic.
International aid groups expressed disappointment that more debt relief isn’t being provided by extending the moratorium on debt payments for a full year or by forgiving part of the debt rather than merely suspending payments.
“This pandemic has laid bare a glaring and unjust double standard: The world’s wealthiest countries play by one set of rules, and the world’s poorest by another,” said David McNair, executive director for global policy at ONE, an international aid group.
G20 officials argued that the relief that is being provided is helping 46 of the 73 countries eligible with efforts under way to expand the help.
Some critics have also complained that China objected to portions of the debt relief plans that have been advanced.
“It is unfortunate that the pressing need for broader debt relief for poor countries is being stymied by the apparent recalcitrance of China, which has become a major creditor,” said Eswar Prasad, an economics professor at Cornell University and a former head of the IMF’s China division. “China has proven a reluctant participant in multilateral debt relief efforts, putting its narrow economic and geopolitical interests ahead of a collective approach to easing the burden on poor countries.”
“We still need to do more,” Mohammed al-Jadaan, the finance minister for Saudi Arabia, this year’s chair of the G-20, acknowledged at a news conference after Wednesday’s meeting. “We must ensure these nations are fully supported in their efforts to tackle the COVID-19 pandemic. ... We have agreed to extend the debt service suspension initiative by six months.”
Al-Jadaan said there will be further discussions at April’s spring meetings to decide whether the suspension should be extended for an additional six months. He stressed that the pandemic has threatened the fiscal stability of many countries, particularly the poorest.
Al-Jadaan said that another finance ministers’ meeting will be held virtually next month, before the leaders’ summit on Nov 21-22. He said the goal will be to agree on a framework that goes beyond even the current debt suspension initiative. He did not elaborate. The United States is represented at the G-20 finance meetings by Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell.
Transparency International, Amnesty International and a collective of groups called CIVICUS had written to the G-20 finance ministers ahead of their meeting to warn that the world is facing a crisis unlike any in the last century and that debt suspension is only a first step. Though the global economy has begun a gradual recovery with the reopening of businesses and borders, the recovery has been sharply uneven.
The groups said that many of the poorest countries are still spending more on debt payments than on lifesaving public services. They urged the G-20 nations to suspend debt payments at least through 2021. Some countries, like Pakistan, have called for an outright cancellation of debt payments.
Oxfam International said it believes that the six-month extension was “the bare minimum the G-20 could do.”
“The failure to cancel debt payments will only delay the tsunami of debt that will engulf many of the world’s poorest countries, leaving them unable to afford the investment in healthcare and social safety nets so desperately needed,” said Jaime Atienza, an Oxfam official who manages debt policy.
Oxfam and other groups are also calling for private lenders and investment funds to make similar concessions for the poorest countries by suspending their debt repayments.