Three of the largest U.S. banks said on Tuesday they had set aside a whopping $28 billion for loan losses, in a stark reminder that much of the economic pain from the coronavirus pandemic is still to come.
Borrowers have been propped up by trillions of dollars in government and bank assistance, cheap credit and loan forbearance programs, but some of that support is going away, and banks said they fear losses will spike.
“The consumers’ incomes are up, savings are up and home prices up,” said JPMorgan Chase & Co CEO Jamie Dimon said on a call with journalists. “The recessionary part” will come later, he said.
JPMorgan and Citigroup Inc each reported huge second-quarter profit declines on Tuesday, while Wells Fargo & Co posted its first loss since 2008.
Banks with big Wall Street businesses were able to offset their loan woes with huge gains in capital markets revenue, particularly trading. The rough results were almost entirely due to loan-loss provisions.
The unprecedented government aid programs have created a disconnect between the financial markets and the economy, such that financial conditions look sunny, but could turn upside down quickly if the temporary assistance expires.
Executives warned that there is still a lot of guesswork involved. Under new accounting rules, lenders have to reserve for the entire life of a loan upfront. That would be tricky under normal circumstances, but when a deadly virus is hitting the economy in unpredictable waves, it is especially hard to say how long the downturn might last.
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