US banks set aside billions as buffer against bad loans

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US banks set aside billions as buffer against bad loans

Wednesday, July 15, 2020

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NEW YORK, United States (AFP) — Three major US banks have set aside an additional US$23 billion as a backstop against bad loans, highlighting the brittle state of the US economy due to the coronavirus pandemic, the companies said yesterday.

The three banks are Citigroup, Wells Fargo and JPMorgan Chase.

The three banks suffered a collective hit of U$5 from bad loans in the latest quarter, and while executives said they hoped that would mark the deepest hit from credit issues, they acknowledged that health of the loans depends on the evolution of COVID-19.

“The pandemic has a grip on the economy and it doesn't seem likely to loosen until vaccines are widely available,” said Citigroup chief executive Michael Corbat.

Corbat said consumer spending in states with bad COVID-19 trends had declined somewhat in recent weeks, but not as much as in the “darkest days” earlier in the spring.

JPMorgan Chase beefed up its reserves with another US$8.9 billion, more than the backstop in the first quarter, as now expects a more “protracted” economic recovery, chief financial officer Jennifer Piepszak said.

Meanwhile, Citigroup added US$5.6 billion in reserves also due to “deterioration” of the outlook, as well as downgrades in loan quality due to the virus, the bank said in a statement.

And Wells Fargo put another US$8.4 billion in reserves in the second quarter, pointing to the “unprecedented” nature of the pandemic.

The reserve increases led to steep drops in profits at JPMorgan and Citigroup, although the banks benefited from improvements in some divisions, such as trading.

However, Wells Fargo reported a loss of US$2.4 billion, compared with US$6.2 billion in profits in the year ago period. The bank, which unlike the others does not have major trading division, said it was cutting its dividend to 10 cents a share from 51 cents.

“Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter,” said Wells Fargo.

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