Big banks built $ 35 billion fortress to protect against coronavirus bankruptcies and defaults

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Bank of America, (BAC) JPMorgan Chase, Citigroup, Wells Fargo and US Bancorp (Usb)set aside an additional $ 35 billion in the first quarter to protect against loans that go bankrupt, according to a tally from Edward Jones.

“I’ve never seen anything like it. It’s pretty amazing,” said James Shanahan, banking analyst at Edward Jones.

Unlike the Great Recession, which unfolded over several quarters, this crisis happened all at once. This required a quick response from the banks.

Bank of America (BAC), citing “current and expected weaker economic conditions” increased its loss absorption reserves by $ 3.6 billion.

“We believe that the deferrals, coupled with the government’s stimulus measures for individuals and small businesses, should help minimize future losses,” Paul Donofrio, chief financial officer of Bank of America, told analysts at a conference telephone. “That said, given the increase in jobless claims, we expect consumer losses to increase later this year and potentially until 2021.”

More reservations could be coming

JPMorgan economists warn that unemployment will climb to 20% and GDP will collapse by an unthinkable 40% in the second quarter.

Beyond the economic shock, the spectacular constitution of reserves in the main American banks was motivated by a new accounting standard that came into force on January 1. Next year. Naturally, this forced the banks to anticipate even greater losses, amplifying the total reserve made up of collective $ 11 billion.

No one knows how long parts of the US economy will remain closed and how strong the recovery will be once it reopens.

A prolonged shutdown will force banks to build up even larger reserves.

“The economy will always be in bad shape if we are always safe in place, restaurants and fitness centers haven’t opened and you can’t have your hair cut,” Shanahan said.

Credit card defaults loom

Total US household debt, including mortgages, hit a record high of $ 14 trillion last year, surpassing the 2008 peak of $ 1.5 trillion, according to the New York Federal Reserve.

Banks are bracing for a wave of credit card defaults caused by skyrocketing layoffs. In the past month, 22 million Americans have applied for unemployment benefits, marking the largest spike since the Department of Labor began tracking this in 1967.

A rapid rise in unemployment is closely linked to credit card losses. Credit cards were already a weak point before this crisis, marked by a constant increase in delinquencies, especially among young borrowers in recent years.

Among the big banks, Citigroup (VS) and JPMorgan are the most exposed to credit card debt, although lenders say credit scores are higher than in the past.

Citi, for example, told analysts that when it tested its current credit card portfolio against the shocks of 2008, the loss rates were 25-30% lower than the bank’s ten years ago.

“We are satisfied with the quality of our consumer credit portfolio,” Citigroup CFO Mark Mason said on a conference call.

Citi has built up its reserves of $ 8.5 billion, giving it an allowance for loan losses of nearly $ 21 billion, or 2.9% of total loans.

The oil crash will cause bankruptcies

Corporate debt is another vulnerability, especially given the record amounts of borrowing taken out by US companies over the past twelve years.

Banks, insurance companies and asset managers surveyed by the International Association of Credit Portfolio Managers are more pessimistic about the threat of credit default than at any time since the Great Recession.

The Federal Reserve has implemented a series of programs aimed at maintaining credit to businesses, including large ones.

The oil industry is particularly struggling because crude has collapsed to its lowest level in 18 years. At $ 20, dozens of high-cost U.S. shale companies could file for bankruptcy, repeating a scenario that occurred during the 2014-16 oil crash.

Wells Fargo has warned that its oil loan losses will exceed the 2014-16 crash, even though the bank’s loan portfolio to industry is now 20% smaller.

“We imagine, because of resource price levels, that the losses given default are considerably worse this time around,” Wells Fargo CEO Charlie Scharf told analysts.

Wells fargo (WFC) had $ 14 billion in loans outstanding to the oil and gas industry at the end of March. The bank’s first-quarter profit plunged 89%, largely on $ 3.1 billion in reserve building.

“You can’t model this”

Small businesses have also been hit hard by the crisis.

The $ 2 trillion stimulus package promulgated by Congress and the White House also allocated nearly $ 350 billion in repayable loans to small businesses. Launched on April 3, the paycheck protection program has already run out and lawmakers are divided on how to replenish it. A deal to add an additional $ 250 billion is likely, although the timing is unclear.

Yet economists have warned that some small businesses will nonetheless succumb to bankruptcy, especially those that lack the resources to access emergency loans. Others, including some restaurants, may struggle to attract customers even after the economy reopens.

“You worry about the possibility of restarting and about small businesses that can operate after being locked out,” said David Konrad, senior research analyst at DA Davidson. “You can’t model that on history.”

Do banks have enough liquidity to weather the storm?

The banking sector entered this crisis in much better shape than the previous one because it was forced to build up loss-absorbing capital. This allowed the big banks to post profits in the first quarter despite building up reserves.

Yet the risk of a prolonged slowdown puts pressure on the big banks to suspend their dividend payments.

Minneapolis Fed Chairman Neel Kashkari is urging U.S. banks to go further by raising $ 200 billion in private capital.

“Unlike the rest of us, banks have the ability to essentially immunize themselves against this crisis,” Kashkari wrote in the Financial Times on Thursday. “They should do it now.

Anneken Tappe of CNN Business contributed to this report.

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