The six giant U.S. banks that just cut $35 billion from their profits to brace for a tsunami of souring loans also offered this confession: They don’t really know how bad it’s about to get. Data that normally hints at pending losses on loans isn’t obeying the financial world’s usual laws of physics amid a slew of government programs temporarily propping up consumers and businesses. The percentage of loans falling into delinquency unexpectedly fell this year even as millions of Americans lost their jobs. People who arranged to defer payments on credit cards and mortgages dutifully sent checks anyway.
It’s an unprecedented situation, forcing bank leaders to make big assumptions about how the pandemic and the government’s response will play out, and what that means for the economy. To adjust its reserves, Citigroup Inc. imagined unemployment might improve modestly to about 10% by year-end. To show it can handle tougher times, JPMorgan Chase & Co. ran projections with it surpassing 20%.
Worse Outlook
Major U.S. banks record bigger provisions for bad debt
Source: Company filings
But then, as bank leaders disclosed their massive provisions in second-quarter results this week, they took turns urging investors not to put too much stock in those numbers.“We are in a completely unpredictable environment for which there are no models, no cycles to point to,” Citigroup Chief Executive Officer Michael Corbat told analysts.