JPMorgan and Wells Fargo lose big on expected loan losses — the defaults are coming
Like that $50 you spotted Tracy for dinner... you know you'll never get it back. JPMorgan is in the same spot — except its loans are in the billions. America's largest bank saw its profit fall a stunning 70% in the quarter, as it set aside an extra $6.8B to cover looming losses from defaulted loans. Wells Fargo also evaporated $3B of its profits to cover expected loan fails.
- Banks make loans to individuals, companies, and government entities, then collect interest on the loans — think mortgages, credit cards, biz loans, and bonds. That's all fine and dandy when most people are able (and expected) to pay those loans back...
- But with 17M newly unemployed Americans and businesses closed across the country, banks are shifting their expectations (big time). Many IOUs will turn into "sorry, I literally cannot pay you back," as sources of income disappear.
Enter "Loan Loss Provisions"... That's money set aside by companies in advance to cover expected future losses. Most earnings reports are backward-looking, but the 1st two big banks to report had more forward-looking reports to share:
Planning for losses is crucial (so is hedging them)... While the banks' consumer units are being pummeled by the economic crisis, it wasn't all bad news. The volatile stock market boosted JPM's trading revenues by 32%, while interest-earning deposits jumped 23% as people stashed cash in checking accounts. While these gains offset some losses, planning ahead for worst-case default scenarios is crucial to the banks' survival.