Banks have booked tens of billions of dollars of provisions to cover an expected rise in customer defaults
Banks have booked tens of billions of dollars of provisions to cover an expected rise in customer defaults © FT montage / Dreamstime

Banks have weathered the first six months of the coronavirus storm. But after a surge in provisions for bad debts and fearing that a boost to trading desks will prove temporary, many believe more pain is yet to come.

“The industry as a whole . . . is well prepared,” Thomas Gottstein, chief executive of Credit Suisse, told the Financial Times. “But if there is a huge second lockdown, a macroeconomic meltdown and actual failures and bankruptcies, [all the banks] will be hit.”

Here are four important points from the industry’s results season.

1. Bad loan provisions rise

Government support schemes have helped suppress customer defaults on both sides of the Atlantic. Nonetheless, this year banks have booked tens of billions of dollars of provisions to cover an expected rise in defaults amid a rise in unemployment and uptick in corporate bankruptcies.

There were even larger provisions in the second quarter than in the first three months of the year, as banks tore up forecasts for a V-shaped recovery. Most lenders are hopeful that the worst of the provisions are now behind them. However, Jamie Dimon, JPMorgan Chase’s chief executive, warned: “We don’t know what the future is going to hold. This is not a normal recession.”

Provisions were higher in the US than in Europe, with more than $57bn across JPMorgan, Wells Fargo, Citigroup and Bank of America alone. The four banks booked their highest quarterly loan loss charges since the financial crisis more than a decade ago.

Wall Street banks have set aside more than their European rivals

New accounting standards, which mandate banks to make provisions for loans’ lifetime losses, explained partly the extent of the increase among US banks.

2. Trading saves the day

Trading was a notable bright spot. Volumes surged as clients scrambled to reposition their portfolios during the pandemic.

Led by Morgan Stanley, Goldman Sachs and JPMorgan, fixed income revenues more than doubled in the second quarter at the six largest American banks, following a gain of about a third in the first three months of the year. That brought in more than $40bn to offset their $60bn-plus of loan loss provisions in the first half.

Graphic showing European bank results for the second quarter of 2020

In Europe, BNP Paribas was the only large bank to post a similar jump in second-quarter revenue, an encouraging sign for the French lender’s project to supplant Barclays and Deutsche Bank as the leading investment bank in the region.

Barclays also performed well, though, with a jump in fixed income revenue of 106 per cent in the first quarter, followed by 60 per cent in the second. This helped vindicate chief executive Jes Staley’s insistence on retaining a sizeable investment bank despite persistent criticism from an activist investor.

Still, no one on either side of the Atlantic is counting on a repeat of the trading bonanza in the second half. Mr Dimon warned that revenue could halve in the remainder of 2020 as markets normalise; other bank executives agreed that revenues would fall but said it was impossible to predict the magnitude. 

Bar chart of Share price change, 2020 year to date (%) showing Banks have struggled to rebound

3. Rising bank capital 

The top six US banks managed to grow their capital marginally in the first half of 2020, despite taking a whopping $60bn of loan loss provisions during the period.

Despite the massive provisions, the banks still posted net income of almost $26bn so far this year. They kept a higher percentage of those profits because they voluntarily suspended share buybacks when the crisis first hit in March. 

4. Cost-cutting accelerates

Several banks entered the crisis with plans to slash their cost base. Their experiences over the past few months have only increased the need to trim outgoings. 

Most banks now have more capital than at the start of 2020

“That’s been the Achilles heel for European banks for some time,” said Stuart Graham, founder of Autonomous Research. “While it is a bit early for banks to be unveiling big cost-reduction plans, they will be looking at what extra fat they can take out.”

Travel restrictions and employees working from home en masse have reduced some costs, but banks are now setting their sights on longer-term savings, many of which will be painful to execute if they involve redundancies and branch closures.

Credit Suisse and Société Générale announced big cost-cutting plans. Meanwhile, HSBC and Deutsche each said they would revive plans for mass lay-offs that had been put on hold at the height of the crisis.

This article has been updated to reflect Barclays’ fixed income revenue in the first and second quarter.

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