[Asia Economy Reporter Jeong Hyunjin] Major Wall Street banks in the United States have set aside as much as $28 billion (approximately 33.8 trillion KRW) in loan loss provisions in the second quarter, warning that large-scale loan losses could occur due to the economic recession caused by the novel coronavirus disease (COVID-19). As the spread of COVID-19 continues rapidly within the U.S. and economic activities are once again hindered by lockdown measures, the pandemic's impact on the economy is expected to become more prolonged and severe.
According to reports from the Wall Street Journal (WSJ) and others on the 14th (local time), JPMorgan, Citigroup, and Wells Fargo announced that they have significantly increased their loan loss provisions in the second quarter to prepare for potential losses on household and corporate loans. This represents an additional nearly $9 billion in loan loss reserves compared to $19.15 billion in the first quarter. Bloomberg News noted, "This surpasses the fourth quarter of 2008, when the global financial crisis deepened," adding that all three banks stated that the economic outlook is worsening as the COVID-19 situation persists in the U.S.
By bank, JPMorgan increased its loan loss provisions from $8.29 billion in the first quarter to $10.47 billion in the second quarter. During the same period, Wells Fargo and Citigroup also raised their reserves from $7.03 billion to $9.57 billion, and from $3.83 billion to $7.9 billion, respectively, to prepare for potential loan losses.
The reason banks have set aside such large loan loss provisions is that the scale of non-performing loans is expected to be larger than anticipated. Until early May, there were signs of economic recovery, but as COVID-19 began spreading again and lockdown measures were reinstated, banks explained that it became necessary to prepare for a prolonged recession. The WSJ also mentioned that since the global financial crisis, prolonged low interest rates have led to increased borrowing, with auto loans, credit card loans, student loans, and corporate debt reaching record levels.
James Dimon, CEO of JPMorgan, said, "We do not know what will happen next. This is not an ordinary recession. We will see an economic downturn ahead," adding, "We are preparing for the worst-case scenario." JPMorgan forecasted that the U.S. unemployment rate would exceed 10% this year and be around 7.7% by the end of next year, predicting a slower recovery than previously expected economic growth rates. Michael Corbat, CEO of Citigroup, also stated, "The pandemic is controlling the economy, and this situation will not be resolved until a vaccine is widely available."
Due to the loan loss provisions, banks saw their net profits sharply decline or record losses in the second quarter. JPMorgan posted a net profit of $4.69 billion in the second quarter, down 51.4% year-on-year. Citigroup's net profit also plunged 73% in the second quarter after setting aside loan loss provisions. Wells Fargo recorded a net loss of $2.4 billion in the second quarter, marking its first quarterly loss in 12 years since the 2008 global financial crisis.
However, CNBC reported that JPMorgan's revenue in the second quarter reached a record high of $33.8 billion, driven by significant gains in its bond trading division. The volatility in the stock market caused by COVID-19 and increased demand for bond investments led to substantial revenue growth in trading. As a result, net profits and revenues were better than experts had expected, earning JPMorgan a relatively strong performance despite challenges.
Following the earnings announcement, JPMorgan's stock price rose 0.57%, while Citigroup and Wells Fargo closed down 3.93% and 4.54%, respectively.
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