The large U.S. lenders are preparing for an economic downturn as millions remain out of work.
Big banks sent a clear message in first-quarter earnings Tuesday: This recession is going to be bad.
JPMorgan Chase & Co. and Wells Fargo & Co. set aside billions of additional dollars to get ready for a flood of customers to default on their loans as the coronavirus pandemic pummels the economy. That sunk the banks’ quarterly profits.
JPMorgan and Wells Fargo are the first big U.S. banks to report first-quarter results, and act as a bellwether for the broader economy. Neither bank has yet seen a wave of loans go bad, but they are preparing for it as the economy plunges further into a presumed recession and millions remain out of work.
Many Americans were already deep in debt before the pandemic, tapping credit cards, auto loans and student loans at record levels to cover a shortfall left by wages that remained flat for many years.
The banks for years rode all that consumer spending and borrowing to big profits. Now, they are preparing to struggle alongside their cash-strapped borrowers. Nearly 17 million Americans have sought unemployment benefits in the past three weeks. About two million homeowners are skipping their monthly mortgage payments, according to industry data.
“This is such a dramatic change of events,” said JPMorgan Chief Executive James Dimon, who returned to work a few weeks ago after emergency heart surgery. “There are no models that have ever done this.”
JPMorgan set aside an additional $6.8 billion in the quarter for potentially bad loans, largely in its consumer bank. That raised its total provision to $8.29 billion, more than the bank has had to take since 2010. But even that may not be enough, the bank warned.
The bank said the provision was based, in part, on the assumption that U.S. gross domestic product would fall an annualized 25% and unemployment would rise to more than 10% in the second quarter. But JPMorgan economists have recently amended their forecast to a 40% decline in GDP in the quarter and a 20% unemployment rate.
Wells Fargo said it set aside an additional roughly $3 billion in the quarter for potentially bad loans, both in the consumer and commercial divisions. That raised its total provision to $3.83 billion.
“We don’t know what the time frame is or how quickly the economy will recover,” said Wells Fargo CEO Charles Scharf. “What we do know is the contraction is real.”
Both banks have pledged to help troubled borrowers and small businesses by, for example, waiving late fees or allowing them to temporarily suspend their monthly payments. They have also taken a central role in disbursing government stimulus money to businesses. But that might not be enough for workers who could be out of a job and small businesses that could be shut down for many months.
Spending on credit cards dropped for both banks. JPMorgan said most customers kept up payments on credit cards through April 1, but that more customers have been late on those loans in the past two weeks. Wells Fargo said that consumers had already contacted Wells to defer more than a million payments, mostly on mortgages and auto loans.
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What’s more, banks and other lenders are starting to toughen their loan-approval standards, particularly for new customers. That means many people could find it hard to get credit just when they most need it.
Shares for both JPMorgan and Wells Fargo fell, with JPMorgan dropping about 3% and Wells Fargo losing about 4%.
JPMorgan earned $2.87 billion, down 69% from $9.18 billion a year earlier. The bank earned $0.78 per share, missing the $2.16 forecast by analysts polled by FactSet. JPMorgan revenue was down 3% to $28.25 billion. That fell short of the $29.55 billion analysts had predicted.
Wells Fargo earned $653 million, down 89% from $5.86 billion a year earlier. The bank earned 1 cent per share, missing analyst expectations of 38 cents. Wells Fargo revenue fell 18% to $17.72 billion. That missed analyst expectations of $19.4 billion.
Wells Fargo also said it took an impairment charge of $950 million on securities because of the economic and market conditions.
Some banking businesses did surge in the quarter. Corporate clients rushed to load up on cash, drawing down lines of credit from the banks and socking it away in deposit accounts. Both banks posted 6% loan growth, driven by corporate lending, and crossed $1 trillion in total loans for the first time.
“People got scared quickly and wanted to make sure they had liquidity,” Mr. Dimon said on a call with reporters.
The volatile stock market boosted JPMorgan’s trading revenues by 32%, with gains in both equities and fixed income. The Federal Reserve attempted to support the economy by twice cutting rates in the quarter, though that pinched the revenue that banks earn from interest.
Wells Fargo’s net interest income dropped 8% from a year ago. JPMorgan’s was flat, but the bank had to cut its full-year guidance.