JPMorgan and Citigroup report economy is not out of the woods

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A curious thing happened in the midst of the coronavirus crisis: America’s largest bank posted higher profit than a year ago, before the pandemic ravaged the economy.

Taken together, the two banks’ third-quarter results show that businesses and consumers alike have held up surprisingly well in the months following the US plunge into recession. But leaders of both banks have warned that the economy has not come out of the woods. The results were improved because the banks did not have to put so much money aside to cover future loan losses. But executives said they had not yet changed their minds that major losses were looming in the future. They continue to hold large reserves for potential losses and have predicted that next year unemployment will remain high and more customers may start to default on their loans.

JPMorgan chief executive James Dimon has warned that without more public support to the economy, it could get worse.

“A good, well-designed stimulus package will just increase the chances of getting better results, but there is so much uncertainty that we are not saying it’s final,” Dimon said on a call with the journalists.

JPMorgan has set aside nearly $ 34 billion for potential losses. If the economy recovers quickly, it could be $ 10 billion more than it needs, Dimon said. In a double-dip recession, he said, the bank may need an additional $ 20 billion in reserves.

The coronavirus recession has unfolded like no other. A massive expansion in unemployment benefits, stimulus checks and other government measures adopted at the start of the pandemic have supported American consumers and businesses so far, keeping the economy afloat. But those measures are running out and lawmakers are stuck in a second round of stimulus.

Third-quarter trading revenue jumped 17% at Citigroup.

Photo:
Andrew Seng for the Wall Street Journal

JPMorgan and Citigroup are the first major US banks to release third quarter results. Their relationships with American consumers and businesses around the world generally make them an indicator of the economy as a whole. Their thinking, however, can be biased: They and other big banks tend to serve relatively well-off Americans, and the strength of this quarter is in part a reflection of the accounting rules that forced them to estimate more pain. in previous quarters.

The economics of coronaviruses have been difficult to analyze. Many people with secure jobs, stuck at home, and with fewer places to spend money have done well. But millions of Americans are out of work or even hungry. Companies including Walt Disney Co.

et Allstate Corp.

have announced a glut of layoffs in recent days. Further closures and a potential second wave of coronavirus infections could also hurt the economy.

Sign of the patchy recovery: JPMorgan completed a record number of auto loans in the third quarter, with borrowers taking advantage of low interest rates to fund large purchases. Mortgage fees have also increased.

Yet customers are still spending less on their credit cards than a year ago, with total spending volume down 8% at JPMorgan and 10% at Citigroup. (Both are up almost 20% from the second quarter.)

So far, loans have remained relatively healthy for banks. JPMorgan canceled $ 1.18 billion in loans and Citigroup canceled $ 1.92 billion, both down from the second quarter.

For example, credit card lending, the region most vulnerable to the pandemic according to both banks, is performing better than a year ago, with just 0.69% of JPMorgan loans and 1.01% of loans. 90 days late from Citigroup. JPMorgan, Citigroup and others have temporarily let customers ignore payments on credit cards and other debts, but both banks said the majority of their card customers were out of those programs and paying on time.

Bank executives, however, said they expected more consumers to fall behind on loans next year. It was not clear, they said, whether the government’s stimulus measures had so far saved the economy or simply delayed larger fallout.

” The question [is] whether the bridge will be long enough and strong enough to allow people to find jobs and get small businesses back to normal, ”said Jennifer Piepszak, CFO of JPMorgan. “I think that remains to be seen.”

JPMorgan’s forecast for the US economy has improved slightly, but it still expects unemployment to stay above 7% for the full year of 2021. Citigroup’s outlook for the US economy l ‘ Next year grew darker than it had been, although it was still rosier than JPMorgan’s with unemployment falling to 6.4%.

Both banks exceeded analysts’ expectations, even though their results were far apart. JPMorgan’s profit increased 4% and sales declined 0.5%. Citigroup’s profits fell 34% and revenues fell 7%.

Profits were boosted by the slowdown in reserve build-up. JPMorgan has set aside $ 611 million for possible future loan losses, far less than expected and the $ 10.47 billion it recorded in the second quarter. Citigroup has set aside $ 2.26 billion, up from more than $ 7 billion in each of the last two quarters. The two banks were able to release some of their previous reserves.

In both banks, Wall Street operations fared better than consumer units. This follows a pattern that shaped the banking industry throughout the recession. Consumers have struggled. But traders took advantage of the uncertain markets and investment bankers took advantage as nervous companies raised liquidity and sold stocks and bonds to weather the downturn.

Trading revenues jumped 30% at JPMorgan and 17% at Citigroup.

Write to David Benoit at [email protected]

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