Bank leaders point to prospects for a recovery this year after unprecedented action by lawmakers and the US Federal Reserve averted a worse crisis.
Wall Street’s biggest fears about the effects of Covid-19 are diminishing.
Three of the largest US lenders – JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. – reduced their combined loan loss reserves by more than $ 5 billion, adding to the highest earnings estimates in the fourth quarter, even as they faced headwinds from low interest rates.
Posting the results on Friday, executives expressed cautious optimism about fiscal stimulus and rising vaccinations amid a pandemic in which delinquencies have remained low. Still, the banks warned that the economy is not out of the woods yet.
Six of the largest U.S. banks have rushed to set aside more than $ 35 billion to cover credit losses in the first half of 2020, saying they simply had no idea what to expect. Bank managers are now pointing to prospects for a recovery this year. Unprecedented action from the Federal Reserve and lawmakers has taken away the worst-case scenarios.
“We have seen a further improvement in both GDP and unemployment,” Mark Mason, Citigroup’s Chief Financial Officer, told reporters at a conference call, referring to gross domestic product. There are many favorable indicators that “provide a more positive outlook in 2020 and hopefully a continued, stable recovery,” he said. In addition to vaccines, he pointed to more clarity about the next US presidential administration and the prospects for additional stimulus measures.
Still, Wells Fargo and Citigroup led to lower bank stocks – each falling more than 6% at noon in New York – as investors focused on weaknesses specific to their business. At Wells Fargo, costs fell less than analysts had estimated as the bank spent money on restructuring after scandals. Citigroup’s massive bond trade generated less income than expected in the closing months of 2020. JPMorgan fell 2%.
Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley will report quarterly results next week.
The consumer divisions at the largest US banks were especially under pressure from the outbreak of Covid-19, which shut down businesses last year and left millions unemployed. Still, the credit books have done surprisingly well since then, as a dreaded bout of defaults has never materialized. After trading divisions benefited from a record year, banks even received approval from the Federal Reserve last month to restart share buybacks.
As JPMorgan informed analysts, Bank of America’s Erika Najarian asked if the government’s backing was strong enough to help borrowers through the pandemic, for example.
“It feels like at this point, in this crisis, the bridge has been strong enough – the question that still remains is whether the bridge is long enough,” CFO Jennifer Piepszak said during the conference call. “But we have to get through the next three to six months.”
JPMorgan raised reserves by $ 2.9 billion, pushing fourth quarter earnings to a record $ 12.1 billion. Citigroup released $ 1.5 billion from its inventory, resulting in a profit of $ 4.63 billion that was less than analysts predicted. Wells Fargo released approximately $ 760 million due to lower net depreciation. That put net income above estimates at $ 2.99 billion.
Much of the releases came from divisions that focus on businesses.
Still, executives warned that there is a lot of uncertainty ahead and that defaults are likely to increase later this year. Jamie Dimon, JPMorgan’s Chief Executive Officer, said the importance of releasing reserves should not be overestimated or viewed as recurring revenue.
“We don’t think of it as profit – it’s ink on paper,” said Dimon.