Credit card issuers brace for consumer default, as evidenced by earning reports released for the first quarter. In a reversal, credit cards quickly shifted from being top bank’s most profitable channels to a high-risk business unit.
According to CNBC:
- JPMorgan is building its credit reserves in anticipation that people might not be able to pay their bills, especially for credit cards. The bank’s first-quarter earnings statement showed its credit reserves increased by $6.8 billion from the prior year, 56% of which was set aside for its consumer card division.
- “In the first quarter, the underlying results of the company were extremely good, however given the likelihood of a fairly severe recession, it was necessary to build credit reserves of $6.8B, resulting in total credit costs of $8.3B for the quarter,” CEO Jamie Dimon said in the earnings release.
- Of the $6.8 billion, more than half — or $3.8 billion — is earmarked for the bank’s Card division. In total $4.4 billion is allocated for consumer finance, with the remaining $2.4 billion for the bank’s wholesale
Top U.S. issuers are better positioned because of regulatory requirements on Current Expected Credit Losses (CECL) (for more information on CECL, see this Mercator Advisory Report).
At Wells Fargo, expect issues on the horizon.
- Wells Fargo on Tuesday reported first-quarter earnings that were well below expectations as the company set aside money for credit losses amid the coronavirus pandemic.
- The banking giant reported a profit of just 1 cent per share, while analysts polled by Refinitiv expected earnings of 33 cents per share. Revenue of $17.717 billion also missed an estimate of $19.284 billion. Wells reported earnings of $1.20 per share in the year-earlier period. Net income dropped 89% to $653 million for the quarter.
- Credit card fees fell 6% year over year to $892 million.
Bank of America will report earnings on April 15, but expect another dismal result, as Seeking Alpha suggests; Yahoo Finance expects that Citi will report “soft growth in consumer banking revenues.”
The top issue with earnings and the pandemic is that no one knows when COVID-19 will peak. Behind the peak is what the recovery will look like. For now, however, the risks are severe, but complying with CECL requirements helps reduce balance sheet risk with strengthened loan loss reserves.
Looking back on CECL and Stress Testing, maybe they were not as rigorous as we thought following the Great Recession. Something to watch is how smaller banks will navigate the mess. In some cases, smaller credit card issuers were excluded from CECL and Stress Testing, and perhaps that was a weak decision. For some top issuers, such as American Express, Bank of America, Citi, Chase, and Discover, squirelling away billions for CECL will decrease the pain.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.