If the US slides into recession, banks will be ready – at least according to commentary on their earnings calls last week. “We and our customers come into the current environment from a position of strength, and that should serve us well,” said Wells Fargo & Co. Chief Executive Officer Charlie Scharf. Having just reported $4.9 billion of quarterly profit, Wells Fargo now has $163 billion of common equity in addition to $15 billion of loan-loss reserves to absorb whatever the economy throws at it. Between them, the eight largest banks in the US have equity capital of almost $1 trillion to cover potential losses.
That’s not to say they won’t be affected. “Banks are a cork in the ocean when it comes to the economy,” JPMorgan Chase & Co.’s Jamie Dimon said on his call. “If the economy gets worse, credit loss will go up, volumes can change, yield curves can change.”
Like others, he's watching and waiting — although, consistent with his TV appearances, he was careful not to disparage the president for unleashing the current worries. (In none of the 10 earnings-call transcripts I reviewed was Trump namechecked by a US bank CEO, though “tariff” was at the top of the agenda.)
And while consumers remained resilient, bankers are sensing a skittishness on the commercial side. “Most clients are pausing their plans,” said Jane Fraser, CEO of Citigroup Inc. “We're seeing some accelerating of imports to stockpile inventories, we are seeing a pausing on significant capex, while everyone waits to get clarity on the full agenda.”
In some cases, clients have begun to draw down loans to navigate the current environment. Bank of America Corp. registered a modest increase in revolver utilization, although others including Wells Fargo, JPMorgan, PNC Financial Services Group Inc. and M&T Bank Corp. haven’t experienced a pick-up linked to economic uncertainty. At PNC, commercial-loan utilization runs at around 50% so any increase could be a useful early indicator of stress.
Faced with such uncertainty, bank CEOs are deferring to their economists for guidance. JPMorgan’s research team is at 60% that a recession will occur in 2025; Wells Fargo is at 55%. By contrast, Bank of America’s research team currently says we won’t see a recession in 2025.
Despite a more benign view internally, Bank of America uses blue chip consensus to derive its provisions in combination with some stress scenarios. According to CEO Brian Moynihan, the bank is currently reserved for an unemployment rate of 6% (compared with 4.1% currently), which is more conservative than peers. JPMorgan increased the unemployment rate embedded in its allowance to 5.8% from 5.5% after adding to the weighting of its downside scenario; Wells Fargo is also at 5.8%; Citi is at 5.1% (including a downside scenario of 6.7%) and PNC and M&T Bank are both at 5% (although PNC has some extra reserves on top). In JPMorgan’s case the shift was significant, requiring it to add $973 million to reserves.
Keen to showcase their strength, several banks used their earnings presentations to compare the current outlook with episodes they have faced before. “This is to make you feel comfortable, not uncomfortable,” Dimon said. “When Covid hit, unemployment went from like 4% to 15% in a couple of months. And we had to add to reserves in a two-month period, $15 billion… So that just sizes up a bad recession. If it’s a mild recession, it will be less than that. If it’s a really bad recession, it will be more than that. Either way, we can handle it and serve our clients.”
Bank of America recalled the global financial crisis as well as Covid as its benchmark, showing how its loans, capital and liquidity stack up today versus then. Its loan book is larger but it has less exposure to unsecured consumer credit and home equity loans, and a more balanced commercial-loan portfolio. Still, every recession is different. As Fraser put it on her call: “Let’s not fight the last war. The issue we’re tackling at the moment is something different.”
Economic downturns are one thing — "[If] it's a very slight recession…we should fare well on that," said Moynihan. Households aren’t very leveraged and have as clean a balance sheet as ever. The average loan-to-value across Bank of America's home-loan portfolio is less than 50%.
But a US administration intent on refashioning the global economy puts these bankers into uncharted waters, where traditional stress tests may not capture the full scope of risk.
“The most important thing to me is the Western world stays together economically when we get through all this, and militarily, to keep the world safe and free for democracy,” said Dimon. “I really almost don't care fundamentally about what the economy does in the next two quarters… We'll get through that. We've had recessions before."
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