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JPMorgan, Citigroup signal that the economy is not out of the woods



A curious thing happened in the middle of the coronavirus crisis: the largest American bank reported higher profits than a year ago, before the pandemic devastated the economy.

Taken together, the results of the two banks for the third quarter show that businesses and consumers have performed surprisingly well in the months since the pandemic plunged the United States into recession. But leaders of the two banks warned that the economy is not out of the woods.

The results were amplified because banks did not have to spend enough money to cover future loan losses. But executives said they had not yet changed their minds that there were significant losses in the future. They continue to hold large reserves for potential losses and have predicted that unemployment will remain high next year and more customers may begin to default on their loans.

JPMorgan CEO James Dimon warned that without more public support for the economy, it could deteriorate.

“A good, well-designed stimulus package will simply increase the chances of us achieving better results, but there is so much uncertainty that we are not saying it is final,”

; Mr Dimon told reporters.

JPMorgan has nearly $ 34 billion set aside for potential losses. If the economy recovers quickly, it could be $ 10 billion more than needed, Dimon said. In a double-dip recession, he said, the bank could need another $ 20 billion in reserves.

The coronavirus recession developed like no other. The large-scale expansion of unemployment benefits, incentive checks and other government measures adopted at the start of the pandemic have stimulated consumers and businesses in the United States so far, keeping the economy afloat. But these measures are exhausted and MPs remain at a standstill in the second round of incentives.

Third-quarter trading revenue jumped 17% at Citigroup.


Photo:

Andrew Seng for The Wall Street Journal

JPMorgan and Citigroup are the first major banks in the United States to report results for the third quarter. Their connections with American consumers and companies around the world usually make them a beacon for the larger economy. However, their impact may be distorted: They and other large banks tend to serve relatively wealthy Americans, and the strength of this quarter is partly reflected in accounting rules that have forced them to assess more pain in previous quarters.

It is difficult to analyze the economy of the coronavirus. Many people with secure jobs left at home and with fewer places to spend money have done well. But millions of Americans are out of work or even starving. Companies including Walt Disney Co.

and Allstate Corp.

announced the oversaturation of layoffs in recent days. More stops and a potential second wave of coronavirus infections could also hurt the economy.

One sign of the uneven recovery: JPMorgan granted a record number of car loans in the third quarter as borrowers took advantage of low interest rates to finance large purchases. Mortgage fees have also risen.

Still, customers are spending less on their credit cards than a year ago, with total spending down 8% at JPMorgan and 10% at Citigroup. (Both have risen nearly 20% since the second quarter.)

So far, loans have remained relatively healthy for banks. JPMorgan wrote off $ 1.18 billion in loans, and Citigroup wrote off $ 1.92 billion, both from the second quarter.

For example, credit card loans, the area that the two banks say are most vulnerable to the pandemic, performed better than a year ago, with only 0.69% of JPMorgan’s loans and 1.01% of the 90-day delay. Citigroup. JPMorgan, Citigroup and others have temporarily allowed customers to miss credit card payments and other debts, but both banks said most customers of their cards are out of these programs and pay on time.

However, bank executives said they expect more consumers to fall behind on loans next year. It was unclear, they said, whether government stimulus measures had so far saved the economy or simply slowed the sharper effects.

“The question [is] whether the bridge will be long enough and strong enough to get people back to work and get small businesses back to normal, ”said Jennifer Piepzak, CFO of JPMorgan. “I think we’ll see.”

JPMorgan’s forecast for the US economy has improved slightly, but still expects unemployment to remain above 7% throughout 2021. Citigroup’s outlook for the US economy next year has become gloomier than it was, although it is still rosy from JPMorgan with the reduction of unemployment to 6.4%.

Both banks beat analysts’ expectations, although their results were very different. JPMorgan’s profit rose 4% and revenue fell 0.5%. Citigroup’s profit fell 34% and revenue fell 7%.

Profits were stimulated by a slowdown in reserve growth. JPMorgan has set aside $ 611 million for potential future loan losses, far less than expected and $ 10.47 billion it has set aside in the second quarter. Citigroup has set aside $ 2.26 billion, up from more than $ 7 billion for each of the last two quarters. Both banks managed to release some of their previous reserves.

In both banks, Wall Street operations performed better than consumer units. This follows a model that has shaped the banking industry throughout the recession. Consumers are struggling. But traders have taken advantage of uncertain markets, and investment bankers have benefited as nervous companies raise cash and sell stocks and bonds to ward off the downturn.

Trading revenue jumped 30% at JPMorgan and 17% at Citigroup.

Write to David Benoit at david.benoit@wsj.com

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