almost 4 years ago • 3 mins
Big US banks reported their first-quarter results this week, and while their trading businesses made all the right noises, their rising provisions against bad loans weren’t so easy on the ear.
First the good news for banks. Last quarter was one for the ages: central banks in the US and UK cut interest rates to record lows as coronavirus circled the globe, and investors – worried about the economic shutdown’s effect on company earnings – presided over the fastest ever stock market slump into a “bear market”. With all that volatility and uncertainty, investors chopped and changed their portfolios more than they otherwise might, which earned banks’ trading business more in commissions and led to higher-than-expected revenues.
Now the bad news: it’s no secret there are even tougher times ahead, so, in preparation, banks ramped up the cash they put aside in case of unpaid loans. And that had a major impact on banks with big consumer businesses (think savings, loans, and credit cards). JPMorgan and Citigroup, for example, had to put $8 billion and $5 billion aside respectively last quarter. Goldman Sachs – whose consumer business, Marcus, is comparatively new – came out relatively lightly, only setting $1 billion aside.
Last up, the frustrating news: a recent change in US financial accounting rules means banks had to squirrel away their loan loss provisions up front, rather than bit by bit over the life of a loan. And while the new rules led to lower bank profits than expected, investors didn’t pay those figures much attention. What investors did pay attention to was the risk that more conservative accounting might prevent banks from making loans when the economy needs it most – not to mention the warnings from a few banks that their previous profitability goals would now be harder to achieve.
Since the global financial crisis, banks’ riskiest activities – like making direct bets on asset prices to line their own pockets – have been curtailed, and pose much less threat to their survival these days than they once did. Plus, banks now have much more emergency cash to cover losses in case of a downturn, and regulators check each year to make sure that’s still the case. So even if several borrowers do default on their debt repayments, it shouldn’t cause as much economic damage as it did last time.
Most economists reckon this quarter will be the economic low-point of the coronavirus crisis, and that things will start getting better in the second half of the year. In other words, they’re predicting a V- or a U-shaped recovery. But if things take longer to bounce back – or if there’s a second wave of infections that again cripples businesses and consumers – analyst estimates may prove too optimistic, and the currently safe dividends many banks have promised will come under threat.
Data out on Friday showed that European car sales (as measured by new registrations) fell by 50% last month – the most ever. With 80% of the global population in some form of lockdown, after all, splurging on a new set of wheels is a long way from most people’s minds. Among the hardest hit were Fiat-Chrysler and Peugeot-maker PSA Group, whose sales fell around 70%. The world’s biggest carmaker Volkswagen, meanwhile, scrapped its earnings prediction for this year altogether.
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