Bank of America, Citigroup and Goldman Sachs have in turn painted, on Wednesday, April 15, a grim picture of the American economy, stopped by the pandemic linked to the coronavirus, by setting aside billions of dollars to cover a expected avalanche of non-reimbursed loans from individuals and businesses.
The three banks sent a message similar to that delivered the day before by their rivals JPMorgan Chase and Wells Fargo, namely that the hard part is yet to come.
David Solomon, CEO of Goldman Sachs, advises clients of the firm "To hope that the situation improves, but to prepare for the worst"he said in a conference call with financial analysts.
Almost 12 years after the financial crisis, however, the banks wanted to make it clear that they had enough cash to withstand the current health crisis. Bank of America provisioned $ 4.8 billion (about 4.4 billion euros), the highest amount since 2010, which reduced its net profit by 48.4% to 3.5 billion in the first trimester. This includes a $ 1.1 billion charge for loans not repaid by businesses.
Disaster scenario
Citigroup’s profit plunged 46.6% to 2.5 billion after a provision of $ 7 billion (about 6.4 billion euros) to cover future customer default. "Our first quarter results were significantly impacted by the Covid-19 pandemic", said managing director Michael Corbat.
Citigroup is imagining internally various scenarios of economic deterioration, ranging from an assumption with an unemployment rate that jumps up to 15% and a contraction of GDP by 40%. The firm, which has observed a fall of 30% in expenses made with its bank cards, plans to reduce its marketing expenses among other things to cope.
Sign of the extent of the damage: Goldman Sachs had to provision $ 937 million (about 860 million euros), more than four times the amount it estimated it was necessary a year ago to make up for the defaults client. This amount is significant insofar as Marcus, its platform for loans and deposits intended for the general public, has only existed since 2016 and that its activity remains weak compared to the financing activities of the economy of its rivals. Quarterly net profit was cut in half by almost $ 1.1 billion.
The situation should not improve in the coming months, warned Paul Donofrio, the chief financial officer of Bank of America, while experts hope a slight improvement due to the plan of 2.2 trillion dollars promulgated at the end of March by Donald Trump to support the economy.
"In view of the increase in jobless claims, we anticipate an increase in consumer defaults at the end of the year, with the possibility that it will spread in 2021"said Donofrio.
Speculation stands out
The sudden cessation of economic activity in the United States in mid-March was followed by the closure of thousands of businesses and SMEs. The factories are shut down. The big companies, in search of cash, rushed to have immediate access to the lines of credit which the banks had opened to them to avoid going bankrupt.
Some 16 million Americans registered unemployed in late March and early April. Many households and SMEs find it difficult to pay their bills, their consumer loans and to honor their monthly payments.
The economy continued to send negative signals on Wednesday: retail sales fell in March, while manufacturing activity in the New York area returned to an all-time low in April.
Faced with this gloom, Bank of America, for example, allowed its customers to postpone the payment of most of their loans for up to three months. About 16% of SME clients have already asked to benefit from this leniency.
If credit has become a headache, banks can rely on speculative activity. Citigroup’s quarterly revenue increased 11.6%, thanks to a 37% jump in revenues from speculative activities, including brokerage of financial products related to commodities, currencies and fixed income. The same activity of "Fixed Income" saw its revenues jump 33% at Goldman Sachs.
