Wells Fargo & Co
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Unemployment remains high, many small businesses are struggling, and there are few signs that Congress and the White House can soon agree on another stimulus package to help the U.S. economy in the pandemic. But Wall Street banks are on the rebound after slumping the first six months of the year.

JPMorgan Chase, Citigroup, Wells Fargo and Bank of America saw their profits partly recover in the third quarter from the depths of the coronavirus-caused recession earlier this year. The turnaround stems mostly from improvements in the U.S. economy that allowed these big banks to set aside less money to cover potentially bad loans — $5 billion in the third quarter versus $33 billion in the second quarter.

“It’s the same story at every bank in the industry right now: lower credit costs are helping restore profitability,” said Kyle Sanders, an analyst who covers the financial services industry for Edward Jones.

The health of the banking sector is a proxy for the U.S. economy, since the banks’ fortunes largely rise or fall depending on whether borrowers are repaying their debts. Trillions of dollars of stimulus and reopening economies have helped partly lift the U.S. economy out of its historic contraction, which in turn has kept banks from having to write down or write off loans.

In the early months of the U.S. pandemic, banks set aside tens of billions of dollars to cover losses that could come from loans that were suddenly going bad. Millions of Americans and store owners, who were reliable borrowers before the pandemic, now found themselves out of work or their businesses temporarily shuttered.

The banks have benefitted from massive government stimulus to keep the U.S. economy afloat. The banks received fees for implementing the government’s Paycheck Protection Program, a $669 billion program that gave forgivable loans to small businesses to keep them paying their employees. Individual Americans got $1,200 stimulus checks, which researchers have found were used to either pay off debts or shore up savings.

Further, Congress and financial regulators have allowed banks to offer payment forbearance to mortgage borrowers for up to a year without having to mark those loans as bad on their balance sheets.

On top of the stimulus, banks entered into this pandemic the healthiest they’ve been in years and certainly healthier than they were before the financial crisis of 2008. Capital levels were at historic highs, allowing banks to buy back stock and increase dividends as soon as they could to return excess capital to shareholders.

For the moment, banks either seem to think the worst is over or are holding off from booking additional losses. JPMorgan set aside $611 million to cover potentially bad loans in the third quarter, a fraction of the $10.47 billion the bank set aside to cover bad loans in the second quarter. On Wednesday, Bank of America said it set aside $1.4 billion to cover potentially bad loans, far less than the $5.1 billion it set aside three months earlier.

But that doesn’t mean the financial troubles are over. Millions remain out of work and coronavirus outbreaks are increasing in geographies either previously not impacted by the pandemic or in places that were hit earlier this year. New York had a jump in cases in Brooklyn but was able to keep its positivity rate below 1%. Meanwhile Wisconsin, and other parts of the Midwest are dealing with record outbreaks.

Without a vaccine, it’s unclear how long the pandemic will impact consumers and the economy. JPMorgan CEO Jamie Dimon told reporters that if the economy keeps improving the bank could be “over-reserved by $10 billion.” But if the economy slips back into recession, JPMorgan might need another $20 billion to cover bad loans.

Despite the banks posting better profits, investors have sold bank shares this week. The KBW Bank Index, which measures the value of the nation’s 24 largest banks, is down 4% in two days. Most of the worry seems to reflect investors’ uncertainty about whether banks will have to set aside additional billions in the future.

“Investors are still jittery about the banks,” Edward Jones’ Sanders said. “These government stimulus and forbearance programs are starting to end, and we know there will be actual losses in the future.”

Wells Fargo CEO Charlies Scharf had a similar outlook.

“As we look forward, the trajectory of the economic recovery remains unclear as the negative impact of COVID continues and further fiscal stimulus is uncertain,” he said in a statement.

The Federal Reserve also seems to be unsure where the U.S. economy is going. The bank last month extended a ban on the nation’s largest banks from buying back their own stock and capped their dividends until the end of the year. The Fed’s goal is to keep these big banks’ balance sheets healthy enough to withstand a potential double-dip recession.

“We thought we would have more clarity this far into the pandemic, but we don’t,” Sanders said.

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Tuesday, October 27, 2020