FREE MEMBERSHIP Includes » ABL Advisor eNews + iData Blasts | JOIN NOW ABLAdvisor Gray ABLAdvisor Blue
Skip Navigation LinksHome / News / Read News


Credit Costs Slam Big U.S. Banks as Margin Pressure Persists

April 21, 2020, 09:15 AM
Filed Under: Banking News

First-quarter earnings reports by the four largest U.S. banks marked an emphatic turn in the credit cycle, as multi-billion dollar reserve builds delivered on market expectations and drove year-over-year declines in EPS that ranged from 43% for Bank of America Corp. to a near wipeout for Wells Fargo & Co.

That's according to a report released by S&P Global Market Intelligence this week.

It was generally too soon for the coronavirus shockwave to appear distinctly in charge-offs or overdue loans, though distress was evident in payment deferrals banks granted to large numbers of borrowers. BofA said it had agreed to deferrals for 3% of its consumer and small business accounts, covering 7% of balances. JPMorgan Chase & Co. said 4% of its consumer "service book" had asked for forbearance.

The big question remains whether the massive provisions will continue in future periods. JPMorgan Chase emphasized the possibility that they might, noting that its economists' projection for peak unemployment in the second quarter had nearly doubled to 20% since the bank "closed the books" on the first quarter.

BofA said its total reserves now equal about 65% of credit losses estimated over the nine-quarter period contemplated in 2019's supervisory stress test severely adverse scenario. CFO Paul Donofrio said BofA's allowance could "go up or down," depending largely on how quickly economic activity resumes. Citigroup Inc. CFO Mark Mason said it was "way too early" to give guidance on second-quarter provisioning.

At Wells Fargo, the first-quarter provision of $4.01 billion was 3.4 times the bank's average quarterly provision in 2019. At JPMorgan Chase, BofA and Citi, first-quarter provisions of $4.76 billion to $8.29 billion were 5.3 times to 6.1 times quarterly averages in 2019. All three of those banks recorded large builds for their massive credit card portfolios, where reserves now range from 8.3% of balances at BofA to 9.7% at JPMorgan Chase.

Net interest income, which had been the swing factor in bank earnings before the credit cycle turned, also dipped year-over-year as the Federal Reserve cut its benchmark interest rate to nearly zero, and long-term rates plummeted with inflation expectations and a dismal growth outlook.

JPMorgan Chase forecast that it would generate about $55.5 billion of net interest income in 2020, down from its projection of $57 billion on Feb. 25, driven by the change in the rate environment. BofA forecast that its net interest income would fall from $12.13 billion in the first quarter to about $11 billion in the second quarter, and stabilize from there.

The forecasts for lower net interest income came despite a surge in loans and assets, and underscored pressure on net interest margins. JPMorgan Chase surpassed $3 trillion in assets for the first time as its balance sheet grew by almost 17% from the fourth quarter to the first quarter.

Some of the balance sheet growth was driven by massive amounts of corporate borrowing against credit lines as big companies sought to build up defensive cash positions. The big banks said that such draws cooled off in April, but that borrowed amounts could remain outstanding for some time as businesses navigate the pandemic. Since the line draws were concentrated in March, they should help drive increases in average earning assets from the first quarter to the second quarter.

Further, the big banks are poised to add billions of dollars of small business loans in the second quarter through their participation in the federal government's emergency Paycheck Protection Program. JPMorgan Chase said that it was working on $37 billion of loans under the program as of the morning of April 14, including $9.3 billion it had already funded. That compares with the $50 billion of draws against commercial credit lines the bank reported. BofA reported that it had processed applications for $43 billion of PPP loans as of April 8, compared with $67 billion in net commercial line borrowing in the first quarter.

The PPP loans carry an interest rate of 1%, but generate processing fees of up to 5% of loan amounts, and much of the principal is likely to be repaid quickly as the government converts money used on payroll and other expenses into grants.

Wells Fargo's net interest margin did tick up two basis points from the fourth quarter of 2019 to 2.57% in the first quarter of 2020, but CFO John Shrewsberry said the bank expects a decline in net interest income when he was asked how the second quarter will compare with the first quarter.

BofA's net interest margin declined four basis points to 2.32%, although Keefe Bruyette & Woods analysts said in an April 15 note that the bank's net interest income beat their expectations.

Still, "investors looked through the potential transitory nature of balance sheet growth and focused on credit," the KBW analysts said. "We do expect low interest rates to remain, so we do not expect meaningful operating leverage near term."

Week's News

Comments From Our Members

You must be an ABL Advisor member to post comments. Login or Join Now.