The largest U.S. banks are cautioning that the economy is not out of the woods yet, warning in earnings calls that there is still the possibility that loan losses could escalate even further.
“I don’t think anybody should leave any bank earnings call this quarter simply feeling like the worst is absolutely behind us and it’s a rosy path ahead,” Citigroup CEO Michael Corbat told analysts Tuesday morning.
In earnings reports covering the three months ended June 30, Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC), the megabanks revealed massive buildups of their provisions for loan losses.
The three large banks now have a total of $81.2 billion set aside as a buffer to bear the brunt of any consumer and corporate loans that can’t be paid back. Over a quarter of that reserve ($22.9 billion) was added just over the last quarter, illustrating the increasingly pessimistic expectations for the volume of loans that will become non-performing.
Bank of America (BAC), which rounds out the big four U.S. banks, will report its earnings before the market bell on Thursday.
At the nation’s largest bank, executives cautioned that their credit models still face uncertainty around the path of the virus and the lack of clarity on further government stimulus.
“We’ve put more meaningful weight on the downside scenario this quarter,” JPMorgan Chase CFO Jennifer Piepszak said. “And so therefore, we’re prepared and have reserved for something worse than the base case.”
JPMorgan Chase has already seen the ratio of nonperforming loans relative to total loans rise by 31 basis points year-over-year to 0.82%.
But Wells Fargo CFO John Shrewsberry told reporters Tuesday that the amount of delinquent or non-performing assets for the current quarter may be understating the fact that many lenders have offered temporary deferrals on loan payments.
“It’ll be two or three quarters out before they hit their cyclical high points,” Shrewsberry said.