Don’t miss the latest developments in business and finance.

Banks brace for big loan defaults by US, global customers

Image
AP New York
Last Updated : Apr 15 2020 | 7:44 PM IST

The major banks in the US are anticipating a flood of loan defaults as households and business customers take a big financial hit from the coronavirus pandemic.

Bank of America and Citigroup said Wednesday that their profits sank more than 40 per cent in the first quarter as both set aside billions for potentially bad loans.

A day earlier, JPMorgan Chase and Wells Fargo reported even steeper drops in profit.

Even the investment banks were not immune to the pandemic. Goldman Sachs' first-quarter profit dropped by 46 per cent from a year earlier, due to significant losses on its own investments as well as a buildup in reserves for potential loan defaults.

The coronavirus outbreak has bought the U.S. economy to a virtual standstill in just weeks. Most economists and bank CEOs expect the U.S. to go through a depression. The only question is how severe: Second-quarter gross domestic product is expected to drop from 30 per cent to 40 per cent and the unemployment rate is seen rising as high as 25 per cent.

On Tuesday, JPMorgan CEO Jamie Dimon said the bank was preparing for a severe recession.

More From This Section

Wells Fargo CEO Charlie Scharf said, We all know we haven't seen anything like this before.

The five banks raised the funds they set aside for bad loans by nearly USD 20 billion combined in the first quarter, as customers ranging from credit card holders to oil companies to retailers may not be able to make their payments.

Many of these loans were fine only weeks ago, but the pandemic has caused companies to shutter and millions to be put out of work.

On Wednesday, BofA said it nearly quintupled its loan loss provisions to USD 4.76 billion, while Citi set aside USD 7.03 billion, up from USD 1.98 billion in the same period a year earlier.

Both have large credit card operations, and BofA also has a large consumer banking business while Citi has a large international banking franchise and lends to companies around the globe.

Despite the hits from the pandemic, BofA and Citi fared better than rivals JPMorgan and Wells, which both saw steeper profit declines and proportionately set aside more money to cover loan losses.

Charlotte, N.C.-based BofA earned a profit of USD4.01 billion, or 40 cents a share, down from USD 7.31 billion or 70 cents a share, a year earlier. Citi's profit fell to USD 2.5 billion, or USD1.05 per share, from USD4.7 billion, or USD 1.87 per share, a year earlier.

Goldman Sachs had to set aside USD 937 million to cover potentially bad loans, up from USD 224 million a year earlier. But Goldman took the biggest hit in own portfolio. The investment bank owns stakes in several large public companies as well as its own private equity portfolio. Many of those companies saw their stocks plummet last quarter as the stock market ended its 11-year bull run, so Goldman had to mark those losses on its balance sheet.

Also Read

First Published: Apr 15 2020 | 7:44 PM IST

Next Story