How much money will US banks lose on loans because of the coronavirus recession?
After 2008 and throughout the 2010-2019, US banks had become more vibrant and had excess capital requirements required by the regulators. The banks were in great shape, the economy was growing, loan losses were down and bank earnings were expected to grow 2%. How a month or two has changed everything, in an article by David Henry of Reuters, losses are expected to be from 14 to 42%.
There are two variables for the change, one is the virus and to fight the virus the need for social distancing which has increased jobless into the 20 million numbers plus. The second is internal to the bank – accounting standards that require the banks to estimate losses for the lifetime of loans and set money aside to cover them. The 4 largest banks JPMorgan Chase, Bank of America, Citigroup and Wells Fargo reported a combined $24 billion in provisions for credit losses, which is 350% more than a year ago.
The projections are unknown because there are many assumptions in the figures – how long does the bank expect the recession to last; while the government stimulus will pay basic costs of rent and food, what about the bank loans? What does their Artificial Intelligence programs tell the banks?
Linking to dividend paying stocks, the banks have been great to hold and for the most part should be part of a diversified portfolio. We all do not know what the economy will look like in June, because shopping and going to bars and restaurants involves social interaction not social distancing.
There are more questions than answers, till the next time – to raising questions.