Big banks set aside billions for potential loan defaults

JPMorgan Chase notched higher-than-expected earnings in the second quarter but braced for losses from borrowers defaulting on their loans, as the bank's outlook for the U.S. economy becomes more pessimistic.
JPMorgan, the biggest bank in the country, set aside $10.5 billion to cover potential losses on its loan books, cutting aggressively into its profits, which came in at $4.7 billion. Its decision to build up reserves reflects “further deterioration and increased uncertainty in the macroeconomic outlook as a result of the impact of COVID-19,” the firm said in a press release.
JPMorgan is preparing for double-digit unemployment through the first half of next year, executives told reporters Tuesday morning.
In the latest sign that the nation’s economic recovery could be in danger, California, the U.S.’s largest state, all but shut down on Monday as officials sought to head off a resurgence of the coronavirus. Gov. Gavin Newsom shuttered indoor activities across the state amid a spike in cases as counties began reopening in recent weeks.
Other states such as Texas, Florida and Arizona, which had started to reopen, have also emerged as new epicenters of the virus.
“This is not a normal recession,” JPMorgan CEO Jamie Dimon said, pointing to government assistance programs that have helped boost income and savings for consumers, as well as home prices. “The recessionary part of this you’re going to see down the road.”
However, the bank was boosted by a record quarter for its bond-trading division, which brought in $7.3 billion, doubling its revenue from the same period last year. That comes as the Federal Reserve has bolstered corporate debt markets, leading to a bonanza of bond sales over the past few months.
JPMorgan's equities division saw gains, too, posting $2.4 billion in revenue, a 38 percent jump.
Citigroup, which also gave its quarterly update to investors Tuesday, announced a profit of $1.3 billion, a 73 percent plunge from the same period last year, after setting aside $7.9 billion for potential loan losses.
Wells Fargo reported a net loss of $2.4 billion, its first drop in over a decade. It added $8.4 billion to its reserves to prepare for potential credit losses. The bank slashed its dividend to 10 cents a share.
“We are extremely disappointed in both our second quarter results and our intent to reduce our dividend,” CEO Charlie Scharf said in a release. “Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter.”
In a call with investors, Scharf acknowledged that a cap the Federal Reserve imposed on the bank’s growth after a series of consumer scandals were unearthed has reduced the bank's opportunities for income.
Still, he said: “We are responsible for the position we’re in” because of past behavior, adding that the company’s leaders previously hadn't made “the difficult decisions necessary” to put Wells on a sustainable long-term path.