The nation’s largest banks showed signs of concern over the economic picture over the next year, with inflation and geopolitical risks behind a rise in expected credit losses.
On Wednesday, first-quarter earnings from JPMorgan Chase (JPM) showed the largest American bank increasing its buffers — for missed lease and loan payments — for the first time since the end of 2020.
JPMorgan Chase CEO Jamie Dimon told analysts on Wednesday that at the moment, economic activity shows strong growth and “extraordinarily good” credit.
“That’s going to continue in the second quarter, third quarter. After that, it’s hard to predict,” Dimon said on his company’s earnings call.
The company added over $800 million to its allowance for loan losses through the first three months of the year due to “high inflation and the war in Ukraine.”
In the early months of the pandemic, the banks dramatically increased their allowances as the economic shutdown drew concerns about households’ and businesses’ ability to repay business loans, mortgages, credit cards, and other bank products.
Through the recovery, the banks have released those reserves, which provided a positive boost to earnings along the way.
‘Unpredictable, to say the least’
The reversal by JPMorgan Chase underscores the concern that recession risks loom.
However, other large banks that reported this week continued to draw down their allowances for loan losses. Wells Fargo (WFC) and Citigroup (C) both reported on Thursday and drew down about $1 billion each in their allowances.
Citigroup management said that it was able to release reserves because the company was slower than other banks to lower its COVID-related buffers in its U.S. personal banking business last year. But the company is still setting aside enough to address its exposure to the Russian economy.
“I expect the macro environment to remain unpredictable, to say the least, in the backdrop of a war,” said Citigroup CEO Jane Fraser on Thursday’s earnings call.
At the more domestic-focused Wells Fargo, CFO Mike Santomassimo said a fading of COVID-related concerns in the first quarter gave management the confidence to further shrink its buffers. Still, an uncertain economic backdrop — as inflation pinches American pockets — is raising the possibility that net charge-offs (a measure of debt deemed uncollectible) will rise soon.
“We do expect that they will increase at some point to more normal levels as the economic environment continues to evolve,” Santomassimo said in a call with reporters Thursday morning.
Year-to-date, the big bank stocks have largely underperformed the S&P 500 (with the exception of Wells Fargo). Bank analysts note that the turn in sentiment means that financial stocks are trading at a discount, but not without risk.
“If you’re an investor and you think we’re going into recession, stocks overall tend to not work very well into that environment. Financial stocks may have a hiccup here as well,” Devin Ryan, director of Financial Technology Research at JMP Securities, told Yahoo Finance Thursday.
Bank of America (BAC), the last of the big four banks yet to report, is expected to release its earnings results on Monday.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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Read More:Big banks cautious about credit losses amid war in Ukraine, inflationary pressures
2022-04-14 18:28:31
