JPMorgan chief executive Jamie Dimon stressed there is still a lot of uncertainty, especially as talks over a US economic support package drag on © Justin Lane/EPA-EFE/Shutterstock

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Two of the biggest US banks enjoyed a rapid rebound in profitability in the third quarter, fuelling hopes of a nascent economic recovery even as the country’s new Covid-19 cases hover near record levels.

JPMorgan Chase and Citigroup both made more than twice as much money in the third quarter of the year as they did in the three months to the end of June, as loan loss charges at both banks plummeted from record levels and trading revenues surged.

“Things do feel better than we thought they would [three months ago],” JPMorgan’s chief financial officer Jennifer Piepszak said on Tuesday. She was referring to the economic outlook and likely loan losses arising from a pandemic that shut down vast swaths of the US economy from late March.

JPMorgan, the biggest US lender, made profits of $9.4bn in the third quarter after posting loan loss charges of just $611m, a far better result than the second quarter when a record $10.5bn of loan loss charges pushed net income to just under $4.6bn. The value of loans in forbearance programmes at JPMorgan more than halved over the three months to $29.3bn, mostly in home loans.

Citigroup, the third-largest US bank by assets, posted net income of $3.2bn for the three months to the end of September, versus the $1.3bn it made in the second quarter, as loan loss charges fell from $7.9bn to $2.3bn.

Loan loss charges are merely assessments of likely future losses rather than actual bad debts. For investors, the true cost of the pandemic will not become clear until banks actually write off the loans over the coming years to account for defaults among their business and consumer clients.

Despite better profits than expected, shares in both banks fell. JPMorgan gave up 1.6 per cent on Tuesday, compared with a 2.9 per cent fall in the KBW Banks Index. Citigroup stock was down 4.8 per cent.

“Investors are looking through the positive news on credit and are concerned about future revenue growth due to the low interest rate environment,” said Gerard Cassidy, analyst at RBC Capital Markets.

Ken Usdin, analyst at Jefferies, said the latest earnings showed interest rate pressures “will be a challenge for the industry and that bank performance “tends to follow the direction of the 10-year [US bond], the yield on which fell on Tuesday.

With Fed rates lingering at record lows, net interest income (NII) — the gap between what a bank pays for deposits and funding and what it earns on loans and other assets — was $1.2bn lower at JPMorgan in the third quarter versus a year earlier, and $1.15bn lower at Citigroup by the same comparison.

Column chart of Unemployment rate  (%) showing JPMorgan's improving outlook for US rebound

“We’re not going to do anything to protect NII,” JPMorgan chief executive Jamie Dimon told analysts, adding that he did not want to deploy the bank’s cash more aggressively since that could put it in a position where “we lose a lot of money” if rates go up.

Citi shares came under pressure after executives declined to provide analysts with a cost estimate or timetable for responding to regulators’ concerns about the bank’s control and risk management systems, following a $400m fine for internal controls deficiencies last week.

On the outlook, Mr Dimon stressed that there was a lot of uncertainty, especially as protracted talks over another US economic support package dragged on.

“A good, well-designed stimulus package will simply increase the chance of a better outcome,” he said. “If the better outcomes happen, we are over-reserved by $10bn. If a double dip happens, we could be under-reserved by $20bn.”

Net charge-offs — which represent actual loans written off less recoveries on bad loans — came in at $1.2bn for JPMorgan, down from $1.6bn in the second quarter. Ms Piepszak said the bank did not expect a “meaningful” increase in charge-offs until the second half of next year, since consumer loans had to be delinquent for 180 days before they were written off.

JPMorgan’s third-quarter earnings also included around $600m of reserve releases, though these were not related to the bank’s improving economic forecasts.

At Citigroup, net charge-offs for the third quarter were $1.9bn, a touch below the $2.2bn of the second quarter, while the bank added $314m of provisions for expected future loan losses. Mark Mason, chief financial officer of Citigroup, said the additional provisions reflected preparation for a worst-case scenario, and that “it is more likely than not that we see reserve releases in 2021 if our base case [for economic performance] holds”.

Trading was another bright spot for both banks in the third quarter. Revenues from JPMorgan’s markets unit jumped 30 per cent year-on-year, better than the 20 per cent increase the bank’s chief financial officer projected in mid-September. Citigroup’s markets and securities’ services revenues were up 16 per cent year-on-year.

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