05 August 2020

FT: Four trends from the bank earnings season

Trading revenues provided a boost but will loan loss provisions absorb a wave of defaults? ..But after a surge in provisions for bad debts and fearing that a boost to trading desks will prove temporary, many believe more pain is yet to come.

“The industry as a whole . . . is well prepared,” Thomas Gottstein, chief executive of Credit Suisse, told the FT. “But if there is a huge second lockdown, a macroeconomic meltdown and actual failures and bankruptcies, [all the banks] will be hit.”

Here are four important points from the industry’s results season.

1. Bad loan provision peak Government support schemes have helped suppress customer defaults on both sides of the Atlantic. Nonetheless, this year banks have booked tens of billions of dollars of provisions to cover an expected rise in defaults amid a rise in unemployment and uptick in corporate bankruptcies. There were even larger provisions in the second quarter than in the first three months of the year, as banks tore up forecasts for a V-shaped recovery. Most lenders are hopeful that the worst of the provisions are now behind them. However, JPMorgan chief executive Jamie Dimon warned: “We don’t know what the future is going to hold. This is not a normal recession.”

Wall Street banks have set aside more than their European rivals Provisions were higher in the US than in Europe, with more than $57bn across JPMorgan Chase, Wells Fargo, Citigroup and Bank of America alone. The four banks booked their highest quarterly loan loss charges since the financial crisis more than a decade ago. New accounting standards, which mandate banks to make provisions for a loans’ lifetime losses, explained partly the extent of the increase among US banks.

2. Trading saves the day Trading was a notable bright spot. Volumes surged as clients scrambled to reposition their portfolios during the pandemic. Led by Morgan Stanley, Goldman Sachs and JPMorgan, fixed income revenues more than doubled in the second quarter at the six largest American banks, following a gain of about a third in the first three months of the year. That brought in more than $40bn to offset their $60bn-plus of loan-loss provisions in the first half....

more at FT £

© FT plc