Heads of the banking sector are pointing to recovery prospects this year, after unprecedented action by lawmakers and the United States Federal Reserve to prevent a worse crisis.
Wall Street’s worst fears about the aftermath of Covid-19 are subsiding.
Three of the largest US lenders – JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. – cut their combined loan loss reserves by more than $ 5 billion, helping with fourth-quarter profit estimates, even though faced headwinds and low interest rates.
In publishing the results on Friday, executives expressed cautious optimism about the fiscal stimulus and increased vaccinations during a pandemic in which defaults remained low. Even so, banks warned that the economy is not yet in danger.
Six of the largest American banks urgently set aside more than $ 35 billion to cover loan losses in the first half of 2020 with the message that they simply had no idea what to expect. Now, the heads of the banking sector are pointing to recovery prospects this year. Unprecedented actions by the Federal Reserve and lawmakers have alleviated the worst scenarios.
“We saw further improvements in both GDP and unemployment,” Citigroup chief financial officer Mark Mason told reporters in a conference call, referring to gross domestic product. There are many favorable indicators that “contribute to a more positive outlook in 2020 and, hopefully, to a continuous and stable recovery,” he said. In addition to vaccines, he pointed to more clarity about the upcoming US presidential administration and the prospects for further stimulus.
Still, Wells Fargo and Citigroup reduced banks’ shares – each falling more than 6% at noon in New York – as investors focused on specific business weaknesses. At Wells Fargo, costs fell less than analysts estimate, as the bank spent money on restructuring after the scandals. Citigroup’s huge securities trading division generated less revenue than expected in the final months of 2020. JPMorgan fell 2%.
Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley are due to release quarterly results next week.
The consumer divisions of the largest US banks have come under special pressure due to the Covid-19 outbreak, which closed businesses and left millions of people unemployed last year. Even so, since then, loan books have done surprisingly well, since a feared default attack never happened. After the commercial divisions benefited from an abundant year, banks even won approval from the Federal Reserve last month to restart stock repurchases.
As JPMorgan informed analysts, Bank of America’s Erika Najarian asked if government support was strong enough to drive credit card holders, for example, during the pandemic.
“It seems that at this point, in this crisis, the bridge was strong enough – the question that remains is whether the bridge is long enough,” said CFO Jennifer Piepszak in the conference call. “But we have to endure the next three to six months.”
JPMorgan cut reserves by $ 2.9 billion, helping fourth-quarter earnings rise to a record $ 12.1 billion. Citigroup released $ 1.5 billion of its stock, resulting in a profit of $ 4.63 billion, less than analysts had forecast. Wells Fargo released about $ 760 million due to net write-offs. This raised net profit above estimates to $ 2.99 billion.
A large part of the launches came from divisions aimed at corporations.
Still, executives warned that there is a lot of uncertainty ahead and a likelihood that defaults will increase by the end of the year. JPMorgan CEO Jamie Dimon said the importance of reserve releases should not be overstated or considered a recurring revenue.
“We don’t consider profit – it’s ink on paper,” said Dimon.