What US bank results can tell us about pandemic impact
Sky’s Ian King says there are some shocking but also comforting numbers as US banks update on their performances.
Every day, evidence has been coming in on the extent to which the US economy is deteriorating in the face of the coronavirus outbreak.
The most dramatic pieces of data have been the weekly jobless claims numbers, every Thursday, which have revealed that, during the last three weeks, an unprecedented 16 million Americans have registered for unemployment benefit.
Another piece of data was released today revealing that, in March, retail sales were down 8.7% on the previous month as the COVID-19 lockdown kicked in.
It is the biggest monthly fall on record and, as consumer activity accounts for getting on for nearly three-quarters of US GDP, it is an ominous indicator of how much the economy is likely to contract. It was also revealed today that US manufacturing output in March was down by 6.3% on February – the worst month-on-month fall for 74 years.
This week, though, evidence is also starting to come through from America’s biggest companies as they report their earnings for the first three months of 2020 – with the banks leading the way. The omens are not good.
On Tuesday, JPMorgan Chase, America’s largest bank, reported a 69% drop in first quarter earnings.
The same day, Wells Fargo – America’s third-largest bank by stock market value and fourth largest by assets – reported an 89% decline.
They were followed on Wednesday by Goldman Sachs, which reported a 46% drop in first quarter profits and Bank of America, the second largest bank in the US, which reported a 45% drop.
At the same time Citigroup, America’s third-largest bank by assets and its fourth largest by stock market value, reported a 46% drop in first quarter earnings.
The figures themselves are no surprise. The profits generated by banks, when all is said and done, reflect the health of the economies in which they operate and, during the first quarter, America’s economy began to suffer.
What has been eye-popping are the factors contributing to those lower profits.
For example, JPMorgan Chase set aside $8.3bn to cover loans it has made that it does no longer expect to be repaid either in full or in part.
That compared with $1.5bn in the same three months last year and was the biggest such provision since the global financial crisis was raging in 2009, although some Wall Street analysts argue the bank has been overly conservative, since just one in 25 of its mortgage holders have so far missed a payment.
Some $4.5bn of the provisions were to cover expected consumer loan losses, in particular, in its credit card business.
Wells, meanwhile, set aside $4bn. To put that in context, the equivalent figure in the same three months last year was $845m.
Wednesday’s numbers were no less scary. Citi set aside $4.89bn to cover expected loan losses, up from just $20m in the same quarter last year, most of which again are expected to fall in its credit card division.
Bank of America set aside $3.6bn to cover expected loan losses while Goldman also raised its provision for loan losses in the quarter to $937m from $224m in the same three months a year ago.
Other trends are also emerging. Jamie Dimon, chairman and chief executive of JPMorgan Chase, highlighted the extent to which corporate clients had been drawing on revolving credit facilities (RCFs). These are lines of credit made available by banks to corporate clients that can be accessed at any time up to a pre-arranged maximum amount.
Mr Dimon, who only last month had to undergo emergency heart surgery, said the rate at which companies drew on their RCFs was about twice the rate seem during the global financial crisis.
He added: “People got scared and they got scared quickly. They wanted to make sure they had liquidity.
“I think companies are very rationally getting their liquidity in order ahead of what could be a significant downturn.”
Bank of America provided more such evidence today. It revealed that outstanding commercial loans during the first three months of the year hit $585bn – up 13% on the last three months of 2019.
What may come as a surprise to those who do not follow these things closely is that there were actually some positives in with all the provisions.
There were record levels of volatility during the quarter, with US stock markets hitting record highs in January, only to plunge sickeningly in March in a way not seen since the crash in October 1987. They then rebounded during the final week of March.
All of this was good news for those banks with substantial trading operations.
For example, Goldman Sachs reported a 33% rise in revenues to $2.97bn from trading in fixed income (bonds), currencies and commodities, which was its best quarterly performance in five years.
Trading in shares generated a 22% rise in quarterly revenues, to $2.19bn, its second best quarterly performance in five years. JP Morgan and Bank of America also reported similarly punchy trading revenues while Citi fared better still with a 39% rise in bond and equity trading revenues – its best quarterly performance in eight years.
Not that these strong trading performances have been enough to make up for the big loan loss provisions. But they will provide a crumb of comfort for investors in US banks.
Perhaps the bigger source of comfort for the wider American public is this:
The banks, on current evidence, do not look as if they are going to require rescuing by US taxpayers in the way they did during the global financial crisis. All have made substantial provisions against potential loan losses. And all are continuing to lend to American companies.
While that may be good news for US taxpayers, the bad news for banking bosses is that US politicians are watching closely to see how quickly they can process emergency loan applications under the US government’s $2.3trn stimulus package.
And, in an election year, they will not hesitate to make them the scapegoats for any perceived failure to get money to households and businesses that need it.