Big banks prepare for protracted recession
The recession triggered by the coronavirus will be deeper and longer than initially expected, according to three big banks that reported drastic tumbles in quarterly profits on Tuesday.
Instead of a quick economic recovery at the end of this year, JPMorgan Chase now expects the recession to be “much more protracted,” said the bank’s chief financial officer, Jennifer Piepszak.
“Our view of the length and severity of the economic downturn has deteriorated considerably” from earlier this year, said Wells Fargo CEO Charlie Scharf. Citigroup said in a statement that it was preparing for “a higher level of stress and/or a somewhat slower economic recovery.”
The banks’ more pessimistic outlooks come as millions of people remain out of work, thousands of small businesses close their doors forever and some states begin to shut down for a second time to contain the spread of the coronavirus.
The recession marks the first big test of the banking industry’s resilience since the last financial
crisis, when banks took billions in taxpayer bailouts. This time, the industry says it is much stronger.
But last month, the Federal Reserve put new restrictions on how the country’s biggest banks spend capital, with an eye toward protecting the financial system from risks to the economy posed by the coronavirus pandemic. A Fed analysis of the banks’ finances showed that they are in good shape now but that some could struggle in the worst-case scenarios of the economic recovery.
JPMorgan Chase and Wells Fargo said Tuesday that they would set aside $8.9 billion and $8.4 billion respectively as they prepared for customers to begin defaulting on their loans later this year. Citigroup increased its reserves to $7.9 billion.
JPMorgan Chase, the country’s largest bank, said its quarterly profit fell more than 50% to $4.7 billion as it built up its reserves. But market volatility helped boost the bank’s trading business, which saw a record 79% jump in quarterly revenue to $9.7 billion.
“This is not a normal recession,” Jamie Dimon, the bank’s chief executive, said in a call with reporters.
“The consumers’ incomes are up, savings are up, and home prices up,” said Mr. Dimon. “The recessionary part” will come later.
The past three months have been tougher for Wells Fargo. The bank reported its first quarterly loss, $2.4 billion, in more than a decade and said its revenue fell to $17.8 billion, compared with $21.6 billion during the same period a year ago.
In a sign of the financial strain facing the San Francisco-based bank, Wells Fargo said it would cut its quarterly dividends to $0.10 per share from $0.51 per share. “We believe it is prudent to be extremely cautious until we see a clear path to broad economic improvement,” Mr. Scharf said.
Citigroup’s profits fell more than 70% to $1.32 billion in the second quarter, compared with $4.8 billion during the same period last year. Revenue increased about 5% to $19.8 billion. This is an “unprecedented situation,” said Citigroup CEO Michael Corbat, adding that the bank was “prepared for a variety of scenarios.”