Tuesday, January 31, 2023

Three big U.S. banks release $ 5 billion in loan loss reserves as a sign of optimism

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JPMorgan Chase, Citigroup and Wells Fargo released a total of more than $ 5 billion in loan loss reserves around the time of the pandemic, a sign of optimism for the economic outlook even as the United States pulls out of the latest wave of Covid-19.

The move helped three of America’s biggest banks end the year on a high note and reflects lenders’ confidence that their customers will repay their debts despite the fallout from the pandemic.

“It’s not like we’re bragging, we aren’t,” said Jamie Dimon, CEO of JPMorgan, who announced a 42% increase in fourth quarter results after releasing nearly $ 3 billion reserved for loan losses at the height of the pandemic.

The three banks took more than $ 31 billion in loan loss charges in the first nine months of last year, fearing the pandemic and related closings could lead to massive defaults among borrowers. New accounting standards have also inflated charges for loan losses.

Mr Dimon, considered by investors to be Wall Street’s most conservative risk manager, said the decision to release reserves was in part driven by “positive developments in vaccines and stimuli.”

He told reporters: “There is no whipsaw. . . it’s just the economy.

“The fourth quarter was better [than expected], this is good news, ”said Dimon. “You are going to have a first quarter, a mixed second quarter, there will be unemployment, you will see problems. . . I hope it will be better after that.

JPMorgan still has over $ 30 billion in its war chest to cover potential loan losses, which Mr. Dimon said reflected “significant short-term economic uncertainty and will enable us to weather a good economic environment. worse than most economists’ current baseline forecasts. “.

Citigroup released $ 1.5 billion from its reserves in the fourth quarter, but still reported a 7% drop in net profits year-over-year, while Wells fargo freed up $ 757 million from its reserves, helping the bank increase its bottom line by 4%.

“Even since we put pencils down. . . To close the quarter, we see a further improvement in the outlook for GDP and unemployment, ”Mark Mason, chief financial officer of Citi, told reporters. He added that increased certainty about vaccines and the Covid-19 stimulus meant there was “a more positive outlook in 2021”.

The exceptional release of reserves and a strong performance of its investment bank left JPMorgan with net income of $ 12.1 billion for the quarter, ahead of analyst expectations of around $ 9 billion. The bank’s fourth-quarter revenue of $ 29.2 billion was up 3% year-on-year and is above the $ 28.6 billion forecast.

“It’s been a good quarter but the outlook is dampened by. . . a benefit of releasing the reserve, ”said Mike Mayo, analyst at Wells Fargo.

All three banks reported lower net interest income from a year ago, as low interest rates narrowed the gap between what banks get paid for their loans and the cost of their funding. Citi also disappointed with higher than expected costs.

JPMorgan shares were down about 2 percent pre-trade, Wells Fargo was down 4 percent, and Citigroup was down 1.4 percent.

Mr Dimon said that the reserve calculations, “although carried out with extreme diligence and care, now involve multiple hypothetical scenarios adjusted to the probabilities over several years, which may or may not occur and which should introduce quarterly volatility into our reserves ”.

JPMorgan’s total revenue grew 20% year-on-year to $ 5.9 billion, while investment banking revenue grew 53% to $ 971 million in the middle of a boom in trading and fundraising. Citigroup also benefited from the continued boom in trading and investment banking, with equity income up nearly 60 percent from a year earlier and fixed income income rising by 7 percent.

The better-than-expected results allow banks to spend more on share buybacks, as the US Federal Reserve capped payments based on recent quarterly results.

JPMorgan board of directors cleared $ 30 billion post-Fed buyback program in December gave him his approval do this. The bank said it would spend up to $ 4.5 billion on buybacks in the first quarter, the maximum allowed under Fed guidelines.

Wells Fargo has said it could make $ 600 million in first quarter share buybacks.

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