Bank CEOs Warn of Unprecedented Economic Slump, Job Losses

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Big banks are often seen as a barometer for the health of the U.S. economy. This week, that gauge turned decidedly negative.

Executives at the largest U.S. lenders gave an unflinching assessment of the pain to come from the pandemic-spurred economic slowdown.JPMorgan Chase & Co. said gross domestic product could decline 40% as unemployment surges as high as 20% this quarter, whileBank of America Corp. forecast a slump well into next year. The top five lenders have collectively set aside about $25 billion for loans they expect to sour.

“We’re in a most unprecedented environment,”Morgan Stanley Chief Executive Officer James Gorman said on the bank’s quarterly earnings conference call Thursday. “We’re in a wild period — we’re going to have negative GDP of, I don’t know, 30%. So short-term, anybody, and I don’t meant to disparage anybody, but a CEO who stands by their short-term targets that were set right before this virus hit, I don’t know what planet they’re on. You can’t predict that.”

With unemployment skyrocketing and stay-at-home orders in place through at least the end of the month, questions loom about how long the Covid-19 crisis will drag on the economy. While bank executives agreed that the downturn would continue in the second quarter, they offered differing views on how an eventual recovery would play out. Gorman himself had the coronavirus, but continued to run Morgan Stanley while in self-isolation and has since recovered.

JPMorgan Chief Financial Officer Jennifer Piepszak said Tuesday that, following a sharp drop in GDP in the second quarter, a solid recovery is expected during the latter half of the year. Bank of America andGoldman Sachs Group Inc., meanwhile, expect a recession and its fallout to persist into 2021. And, atWells Fargo & Co., CFO John Shrewsberry said the bank is taking a longer-term approach to growth, expecting contraction in the range of mid-to-high single digits this year, followed by flattening, but not growth, next year.

Despite all their talk of planning for the future, one common trend among bank executives this earnings season was uncertainty. They used the word “recession” and described the situation as “unprecedented” more than three dozen times in their conference calls with analysts this week.

“We are grappling with an unprecedented global crisis that is putting extraordinary pressure on all of society,” Goldman Sachs CEO David Solomon said Wednesday. “It is too early to know the full impact, or to predict the specific path to recovery.”

Some help is expected in the form of federal stimulus checks for individuals and the Paycheck Protection Program for small businesses, but how effective those will be is unknown, Piepszak said. Bank of America CFO Paul Donofrio said that while he expects consumer loan losses to increase with unemployment, they may be limited somewhat by payment deferrals and government assistance.

‘Real Question’

“The real question will ultimately be how long this shutdown actually continues, which, again, none of us know,” Wells Fargo CEO Charlie Scharf said on an earnings call Tuesday. Also remaining to be seen is whether assistance such as forbearance plans, fee waivers and government intervention “will actually be able to bridge individuals and small businesses and larger corporations to the other side of this.”

Each bank added billions of dollars of loan-loss provisions, funds set aside to cover delinquent consumer and corporate debt. The four largest consumer banks — JPMorgan, Bank of America,Citigroup Inc. and Wells Fargo — set aside roughly $14 billion for consumer losses and about $7 billion for corporate losses.

Morgan Stanley said anextended period of depressed economic activity to combat the disease would hurt results and cause it to miss financial targets.

Banks were criticized during the 2008 financial crisis for being slow to make provisions for loan losses. More than a decade later, they’re in a stronger position to prepare for souring loans. The allocations serve a dual purpose: They show prudence to regulators and investors, and curb earnings at a time when the rest of the economy is suffering. If the losses don’t materialize, lenders can claim back the profits in the future.

Citigroup, which has a consumer unit dominated by credit cards, boosted its loss allowance to five times the current level of soured loans. Wells Fargo, which is relatively bigger in mortgages, has a reserve that’s only two times its non-accrual loans.

Retail, Airlines

Discussions about default risks focused on particularly hard-hit industries such as oil, real estate, retail and airlines. As companies issue negative earnings reports, banks such as Wells Fargo could continue to add to their corporate loan-loss reserves, Scharf said.

The banks are also being hurt by a decline in credit-card spending amid shutdowns of stores and restaurants, travel restrictions and mounting job losses.

“While most spend categories were ultimately impacted, we did see an initial boost to supermarkets, wholesale clubs and discount stores as people stocked up on provisions, but even that is now starting to normalize,” JPMorgan’s Piepszak said.

JPMorgan and Bank of America forecast that net interest income — revenue from customers’ loan payments minus what banks pays depositors — will see the steepest declines in the second quarter amid low interest rates. Bank of America CEO Brian Moynihan expects loan and deposit growth to mitigate the negative impacts of longer-term asset repricing.

“We’ve been saying for some time that we’re late in the cycle,” said Wells Fargo’s Shrewsberry, referring to the ups and downs of GDP. “We’re going to stop saying that, because now we’re early in the cycle.”

— With assistance by Michelle F Davis, and Hannah Levitt

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