Not even Wall Street titans know the true cost of the coronavirus crisis
An $8.3bn provision for bad loans is steep, even for JP Morgan Chase, the biggest bank in the US. Is it even roughly the correct number, though?
Jamie Dimon, unrivalled titan of Wall Street, didn’t quite shrug his shoulders nor did he indulge his normal habit of assessing the state of the world for lesser mortals. The provision was taken because of “the likelihood of a fairly severe recession”, which is stating the obvious, but then his finance director said the reserves “could be meaningfully higher in aggregate over the next several quarters relative to what we took in the first quarter”.
In other words, the financial damage could be a lot worse than JP
Morgan’s first assessment. Therein lies the external truth about banks’ credit provisioning: the numbers are guesswork – and now more so than ever. Dimon is as much in the dark as everyone else.
JP Morgan can, of course, easily absorb its provisions. Even after the $8.3bn (£6.5bn) charge, the bank recorded profits of $2.9bn. Only a few bricks have been dislodged from the “fortress” balance sheet the bank never fails to mention.
Yet stock market investors, you would think, might pause for reflection at this point. Share prices have rallied hard for two weeks on the assumption that lockdowns will soon be over and governments’ stimulus packages will ensure a rapid return to normal economic life. The script looks highly speculative and JP Morgan, a supposed bellwether of the US economy, isn’t giving any reliable signals in support. Rather, even $8bn could be just the first course.
New Centrica boss must offer something new
The chief executive’s gig at Centrica used to be a big job in UK plc. The owner of British Gas would usually be able to pluck a high-flyer from the ranks of a major oil and gas company; Iain Conn, chief until last month, had been head of BP’s downstream operations.
These days succession planning seems to be more of an on-the-hoof affair. Conn was originally supposed to stay until the summer while a new recruit was found, but finance director Chris O’Shea was installed as a standin a few weeks ago. Now O’Shea has got the job permanently because Scott Wheway, himself a newbie as chairman, says he is “comprehensively the best candidate”.
Maybe he is. But the internal promotion of the finance director, even one who has been in post for only 18 months, probably isn’t going to satisfy those investors who think Centrica is in urgent need of a shakeup, which usually means an outsider.
You can see any appearance of continuity would not appeal. On Conn’s five-year watch, the share price fell from 280p to today’s 33p. With a stock market value of just £2bn, Centrica is heading out of the FTSE 100 index unless the battered share price doubles by June.
O’Shea – who knows? – may turn out to be a brilliant appointment. But his day-one reference to “structural simplification” (code for selling the oil and gas production assets plus the 20% stake in outage-prone nuclear generator British Energy) and the pursuit of growth in “customer facing businesses” was straight from Conn’s playbook.
If he has something different to offer, O’Shea would be advised to reveal it at an early opportunity.
The banking bonuses battle is coming
Don’t weep too hard for Jes Staley, chief executive of Barclays, who is having to wait a little longer for a tranche of shares worth £150,000 that were due to arrive in June.
“In light of the current environment”, which means an instruction to banks from the Bank of England to go easy on pay, he’ll collect the first 20% portion of his reward from a 2017-2019 incentive scheme in March next year instead. He’ll survive, especially as he collected his much larger annual bonus only last month.
The interesting piece in the regulatory pay manoeuvres, however, is what happens in the new year when banks’ bonus season comes around again.
Capital buffers will need rebuilding after absorbing losses from bad loans. Executives’ bonuses, by rights, should be slashed until the defences are restored. An instruction from Threadneedle Street to pay zero bonuses would make life interesting. It’s next year’s battle, but it’s coming.