Preparing for a slew of bad loans, US bank loan loss provisions exceeded all expectations, as JPMorgan Chase chief Jamie Dimon noted ‘this is not a normal recession’ © REUTERS

Three of America’s biggest banks have set aside a combined $28bn for current and future loan losses, pushing Wells Fargo to a quarterly loss and hitting profits at JPMorgan Chase and Citigroup as lenders count the cost of the coronavirus crisis.

Jamie Dimon, chief executive of JPMorgan, which reported a record $10.5bn of loan loss provisions in the quarter, said charges could rise if the economy worsened. “We don’t know what the future is going to hold. This is not a normal recession,” he said, adding that the bank was “prepared for the worst-case scenario”.

The bumper loan losses drove JPMorgan’s earnings down 51 per cent year on year to $4.7bn, and Citigroup’s down 73 per cent to $1.3bn.

The pain was partly cushioned by a boom in trading, with JPMorgan fixed-income trading revenues surging 99 per cent. Fixed income trading also rose sharply at Citi, with trading revenue climbing almost 60 per cent in the quarter.

Wells Fargo, which has a smaller investment bank and has underperformed peers since a mis-selling scandal in 2016, suffered a $2.4bn loss — its first quarterly loss since the financial crisis, against a profit of $6.5bn a year earlier.

“We are extremely disappointed in both our second-quarter results and our intent to reduce our dividend,” said Charles Scharf, chief executive of Wells, which booked credit charges of $9.5bn for the quarter.

Column chart of $bn showing Net income across Citigroup, JPMorgan Chase and Wells Fargo hits lowest level since financial crisis

Wells slashed its quarterly dividend from $0.51 to $0.10. It had previously signalled an unspecified cut because of new rules from the Federal Reserve capping dividends at recent earnings. Scott Siefers, analyst at Piper Sandler, said the cut was “bigger than we expected”.

Shares in Wells fell 5.6 per cent in early trading in New York to $23.99. Shares in Citi were down 2.9 per cent to $50.71 while JPMorgan’s shares were up 0.24 per cent to $97.87.

Kyle Sanders, analyst at Edward Jones, said a cap on Wells’ balance sheet imposed in response to the mis-selling scandal “is a huge disadvantage with Covid: the other banks are growing loans to compensate [for falling margins] but Wells can’t do that.”

JPMorgan grew its loan book by 4 per cent year on year, while its deposits were up 25 per cent as companies borrowed money and hoarded cash. Citi’s loan book was stable year-on-year; Wells’ fell slightly.

Executives at the three banks stressed that while consumers had largely continued to pay their loans as normal, the outlook was hard to forecast because of uncertainty around the pandemic and the impact of propping up US wages and debt markets.

Column chart of Loan loss charges across Citigroup, JPMorgan Chase and Wells Fargo ($m) showing Loan loss charges across the three banks exceed those during the financial crisis

JPMorgan’s estimates for future loan losses were based on conservative assumptions about five possible scenarios, the bank said, adding that it did not expect another big round of provisions for future losses. However, it is forecasting an increase in costs from actual loan losses.

Citi based its assumptions for future loan losses on a scenario that included the unemployment rate peaking in the “low- to mid-teens” in the second quarter and US gross domestic product falling sharply, said chief financial officer Mark Mason.

At Wells, the provisions assume that unemployment declines to 10 per cent this year and the US returns to growth in the second half of the year, with housing prices stabilising and commercial real estate prices falling by the low- to mid-teen percentages.

The banks’ profits were also hit by falling interest rates, as the Federal Reserve acted aggressively to protect the economy from the pandemic. The average net interest margins at the three banks — the yield on their assets less the interest rate on their deposits and borrowings — was 2.1 per cent in the second quarter, compared to 2.6 per cent a year earlier. 

Additional reporting by Joe Rennison and Tommy Stubbington in London

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