What Banks Tell Us About Covid-Era Business: 'Everybody Is, Bluntly, Struggling'
July 18 2020 - 5:59AM
Dow Jones News
By David Benoit
Big banks expect the coronavirus recession to cut a wide swath
through corporate America.
When they reported second-quarter earnings this past week, big
U.S. lenders said they don't expect the U.S. economy to pull out of
its slump soon. A protracted downturn, bank executives said, bodes
poorly for all manner of American businesses, even those not
directly affected by the travel bans and social-distancing measures
put in place to curb the virus.
From the first quarter to the second, the four biggest American
banks nearly doubled the amount of money they set aside to cover
soured corporate loans. It was different in the first quarter, when
banks increased provisions for consumer loans far more.
Even what looked like good news wasn't really.
Investment-banking revenue soared in the second quarter. But the
gains didn't come from advising CEOs on deals; rather, banks raked
in fees helping companies stockpile cash to ride out the
downturn.
"Everybody is, bluntly, struggling," Bill Demchak, chief
executive officer of PNC Financial Services Group Inc., said on an
earnings call Wednesday. "The generic corporate client we talk to,
who's otherwise open and doing business, is almost without
exception down from what they would have expected going into the
year and down from where they were last year."
Banks have unrivaled visibility into the health of the U.S.
consumers and businesses. They guard deposits, engineer mergers and
lend money. They see how much is going into customer accounts, how
much is going out and where money is being spent.
In the second quarter, they saw some alarming things. One by
one, bank executives warned that the worst of the coronavirus
recession has yet to come. They said they no longer expect a quick
snapback in economic activity or employment.
"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 Inc. Chief Executive Michael
Corbat told analysts Tuesday. "I don't want to be pessimistic...I
want to be a realist."
The four biggest American banks -- JPMorgan Chase & Co.,
Citigroup, Bank of America Corp. and Wells Fargo & Co. -- set
aside $33 billion in the second quarter to cover loans that could
go bad. Corporate lending accounted for $16.8 billion of it, up
from $8.8 billion in the first quarter. (Bank of America set aside
less for loan losses than the other banks. Chief Executive Brian
Moynihan said early signs of a rebound are encouraging.)
JPMorgan, the biggest U.S. bank by assets, set aside $4.6
billion for commercial loan losses, up from $2.4 billion in the
first quarter. It kept its consumer provision flat at $4.4
billion.
"In the first quarter, when we were really looking at a deep but
short-lived downturn, we were really very much focused on most
impacted sectors," said JPMorgan Chief Financial Officer Jennifer
Piepszak. "Now that we're looking at a more protracted downturn,
we're reserved for a much more broad-based impact across
sectors."
Clients are hunkering down too. Even after the economy showed
some signs of improvement, bankers said, companies were deep in
emergency-preparation mode and loading up on cash.
When America shut down in March to beat back the coronavirus,
companies stockpiled cash by drawing down their credit lines. In
the months that followed, bankers said, companies paid back that
debt and replaced it with new loans, bonds or convertible-stock
offerings. JPMorgan, Morgan Stanley and Goldman Sachs Group Inc.
all notched some of their best investment-banking quarters on
record thanks to those offerings.
"People are scared, and they are responding by both banking
their cash and basically prefunding their borrowing needs as much
as they can," Wells Fargo bank analyst Mike Mayo said.
Some companies sold debt or equity more than once. Delta Air
Lines Inc., a company deeply damaged by the pandemic, was among the
bond market's repeat customers in the second quarter. Companies
more insulated from the crisis, including Netflix Inc. and Slack
Technologies Inc., raised funds too.
"The conversations are now about sustainability," said Tyler
Dickson, co-head of banking, capital markets and advisory at
Citigroup. "What can I do to survive this and, even more
importantly, when I see the other side am I a winner?"
In good times, all that borrowing would be expected to spur
investment and expansion. But businesses are parking it in their
bank accounts. The U.S. banking system has added $2.2 trillion in
deposits so far this year, triple any other six-month period on
record, according to Federal Reserve data.
"We cannot forecast the future," JPMorgan CEO James Dimon told
analysts. "We don't know. The word unprecedented is rarely used
properly. This time it's being used properly."
--Orla McCaffrey contributed to this article.
Write to David Benoit at david.benoit@wsj.com
(END) Dow Jones Newswires
July 18, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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