Optimistic banks begin to turn ‘bad loans’ back to ‘good’
CHARLOTTE, NC (AP) – The pandemic and recession aren’t far over, but banks are feeling optimistic enough to start pulling potentially ‘bad’ loans off their books and putting them back on the ‘good’ pile.
The financial performance of major U.S. banks has improved compared to early 2020, when the virus pandemic shook the global economy. JPMorgan and Wells Fargo saw their profits increase in the fourth quarter; Citigroup’s profit fell in the last quarter of 2020, but rose from the third quarter.
All three banks have a more positive but cautious economic outlook, which was reflected in an accounting maneuver that each employed and which significantly contributed to their better results.
JPMorgan reported a record profit of $ 12.14 billion, compared to a profit of $ 8.52 billion a year earlier. About a quarter of that profit – $ 2.9 billion – came from JPMorgan which “freed up” some of the funds it set aside last year to cover potential loan losses caused by the pandemic and the recession that followed. Citigroup has had a similar story, releasing $ 1.5 billion from its loan loss reserves it set aside earlier last year. Wells Fargo pulled out a modest amount of money from its reserves – less than $ 200 million.
Yet these amounts are only a fraction of the tens of billions of dollars of their so-called loan loss reserves to cover potentially bad loans in the early months of the pandemic. Banks are required to set aside loans that may become unpayable on their balance sheets to show whether they have enough money to meet the needs of depositors and regulators.
This was due in large part to the fact that millions of customers and businesses that were financially well in February 2020 were suddenly in big trouble in March 2020, as local and state governments shut down their economies to combat the early stages of the pandemic.
But billions of dollars in government stimulus packages and the reopening of businesses in many parts of the country have resulted in less financial carnage than bank executives and investors initially expected. Notably, the Paycheck Protection Program, which has helped businesses cover basic expenses like payroll, has helped keep some businesses afloat.
“The fear of a wave of COVID-related bankruptcies has not happened,” said Octavio Marenzi, CEO of Opimas, a capital markets management consultancy.
By releasing funds from loan loss reserves, banks cited improving the economy. While still not fully recovered from the March and April closures, the economy is better than it was six or nine months ago. And with the mass vaccination efforts underway, banks are feeling a little better about the situation.
But there is still a significant degree of uncertainty when it comes to banks. JPMorgan still has more than $ 30 billion tied up in its loan loss reserves, and banks like Citi and Wells have similar numbers on their balance sheets.
“Thank goodness for the vaccine,” Jamie Dimon, CEO of JPMorgan Chase, said on a call with reporters Friday. But at the same time, Dimon said that “all bets are off” on how the US economy might turn out if the vaccine is not as effective as expected.