Big banks lean on conservative projections for 2021 amid stimulus talks
The country’s biggest banks are incorporating cautious forecasts into their growth projections for 2021, adding that this year’s economic recovery will largely depend on the impact of further stimulus from Washington.
Friday morning, JPMorgan Chase (JPM), Citigroup (VS), and Wells Fargo (WFC) reported earnings for the fourth quarter of 2020. The three banks said improving economic prospects allowed them to free up nearly $5 billion in reserves that companies had built up last year to absorb losses on loans.
Provision for loan losses fell $2.5 billion at JPMorgan Chase, $1.5 billion at Citigroup and $758 million at Wells Fargo.
But the three banks still have about $72 billion in total reserves, nearly double the amount of reserves the three banks held before the crisis.
The management of the three megabanks offered a more optimistic outlook on the economy in 2021, but made it clear that they were not comfortable enough with the road to recovery to release more reserves.
In response to a question from Yahoo Finance, JPMorgan Chase Chairman and CEO Jamie Dimon said could be “cloudy” quarters to start 2021.
Dimon’s statement alongside the publication of company results warned that the bank’s decision to release reserves took into account “multiple, multi-year, probability-adjusted hypothetical scenarios, which may or may not occur.”
An important part of these scenarios: the size, scope and effectiveness of additional stimulus. As talks progress in Washington, Wall Street banks are making it clear they would like to see fiscal support to prop up the economy through the vaccine rollout.
“We support this, not because it’s good for the bank, but because it’s good for American citizens,” Dimon said.
“A bit of a question mark”
On Thursday, President-elect Joe Biden unveiled a $1.9 stimulus package which offers direct payments to Americans and a $15 minimum wage, among other provisions.
The news was likely too recent for banks to incorporate into their earnings forecasts, but Wells Fargo chief financial officer Mike Santomassimo told reporters on Friday there was uncertainty about the effectiveness of the next stimulus package to connect the economy to a post-pandemic world.
“We hope so, but I think it’s a bit of a question mark,” Santomassimo said.
Wells Fargo’s reserve release was by far the smallest of the three megabanks to report on Friday. But Santomassimo said he was comfortable with the level of reserves given “the full range of scenarios that could potentially unfold”.
Citigroup Chief Financial Officer Mark Mason expressed optimism about the upcoming fiscal support.
“There are a lot of favorable indicators that support the direction of the variables and make the outlook more positive,” Mason told reporters on Friday.
During the company’s earnings call, Mason added that additional aid would support Citi’s broad borrower repayment capacity. But Mason said the economy still faced a “pessimistic scenario”, warning that losses could peak in 2022, particularly in the bank’s US consumer business.
“We’re all trying to figure out if the decline in delinquencies and the lower level of losses that we’ve seen so far are delaying or loss deflation,” Mason said. “And only time will tell.”
The last of the country’s big four banks, Bank of America (BAC), is expected to report results on Tuesday, January 19.
Brian Cheung is a Fed, economics and banking reporter for Yahoo Finance. You can follow him on Twitter @bcheungz.