Banks stockpile billions to cover bad loans, as they prepare for worst

Three of the nation’s biggest banks revealed Tuesday that they had set aside billions of dollars to cover potential losses on loans, signaling that they don’t expect consumers and corporations to be able to pay their debts in the coming months as the pandemic continues to gut employment and commerce.

Collectively, JPMorgan Chase, Citigroup and Wells Fargo have put aside $25 billion during the second quarter, they said. As a result, their quarterly profits plunged. It was Wells Fargo’s first quarterly loss since 2008.

Bank executives said government aid had so far cushioned the economic fallout from the coronavirus pandemic, which sent millions of workers home beginning in March as cities and states began to shut down. These federal programs, meant to help tide Americans over the worst of the crisis, include a $600 weekly supplement to unemployment benefits. But as the programs begin to expire in the coming months, banks expect their loan losses to mount because defaults will probably rise.

“We’ll expect to gain more visibility on the damage that we’re dealing with over the coming months,” Jennifer Piepszak, JPMorgan’s chief financial officer, said on a conference call with journalists Tuesday.

Banks, especially the nation’s largest, have a view into almost every aspect of the economy, thanks to their businesses making home and auto loans, issuing credit cards and lending to small and medium-size businesses, as well as their Wall Street operations. Their forecasts use insights gleaned from these activities and take into account data from the Federal Reserve, so their actions can be an important gauge of the overall financial health of individuals and businesses.

JPMorgan is preparing for the unemployment rate to remain in double digits for the rest of the year. Wells Fargo, too, set its unemployment forecast for 10% until the end of 2020. Its chief executive, Charles Scharf, said the bank’s views “on the length and severity of the downturn deteriorated substantially” over the past three months.

The Fed warned this month that consumer spending was likely to remain depressed into next year and that there was a serious chance of a double-dip downturn that could permanently scar the American labor force.

JPMorgan’s profit for April, May and June fell to $4.7 billion, just under half of what it earned a year earlier, even as its revenue came in at nearly $34 billion — a record and up from just over $29 billion in the second quarter of 2019.

The bank set aside nearly $11 billion to the pool of money it keeps ready to cover any losses, $9 billion more than last year, bringing its total credit reserves to near $34 billion.

Of the new addition to the reserves, almost $6 billion was designated to handle losses on loans to consumers, including credit cards.