JPMorgan Chase and Wells Fargo are stockpiling reserves in the expectation of increased credit losses as a result of the unprecedented COVID-19 economic crisis, according to the companies’ first-quarter earnings calls today.
Chase Auto, for one, increased its allowance for credit losses 57% year over year to $732 million and anticipates that number will continue to climb amid a 25% decrease in GDP and record high unemployment rates, JPMorgan Chase Chief Financial Officer Jennifer Piepszak said during the earnings call.
JPMorgan Chase, overall, reported a $6.8 billion net increase to the allowance for credit losses driven by the impact of COVID-19 for firmwide total credit reserves of $25.4 billion.
Wells Fargo Co. also increased its allowance for credit losses under current expected credit loss provisions (CECL) to $12 billion, largely due to expected fallout from the coronavirus pandemic and increased draws on loan commitments, Chief Financial Officer John Strewsberry said during the company’s earnings call today.
That $12 billion includes an additional $3.1 billion in allowance for credit losses (ACL) for loans and debt securities the bank added between Jan. 2 and March 31, as the pandemic escalated. Wells Fargo did not break out provisions for auto losses separately.
“We’re taking a longer-window approach rather than a quick view and thinking about growth through the rest of the year and into next year,” Strewsberry said, noting they expect negative growth this year and a flat 2021.
The San Francisco-based bank is gearing up for increased credit losses “these unprecedented times could have on our customer’s credit worthiness,” Strewsberry said. Wells Fargo has already deferred from March 9 through April 10 “over 1 million payments representing $2.8 billion of principal and interest payments for loans” across all loan segments.
Still, Wells Fargo’s auto portfolio has yet to feel the effects of the COVID-19 economic crisis, largely due to its blanket deferral program.
Net charge-offs dropped 14 basis points year over year to 0.68%, and five bps from last quarter. Similarly, 30-plus day delinquencies also dropped to 2.3%, a 2 bps year-over-year change but 27 bps drop since last quarter.
Outstandings grew to $46.8 billion, inching up 1% from last quarter but 8% YoY. Origination volume, however, was the only metric to feel the immediate effects of rising unemployment and shelter-in-place spurred by the current economic crisis, which dropped to $6.5 million, a 5% decrease compared to last quarter.
“Unemployment is growing beyond what we’ve traditionally modeled,” Chief Executive Charles Sharf said during the earnings call. “While there is hope that this is time-bound by shelter-in-place orders, we don’t know what the timeframe is or how quickly the economy will recover when these borders are lifted. What we do know is the contraction is real.”
Wells Fargo’s increase in ACL extends beyond potential consumer-facing credit losses; it also takes into account potential drawdowns from its commercial and industrial lines of credit.
“In mid-March, as the crisis began to evolve, we first saw a small increase in deposits and drawdowns in committed lending facilities,” Sharf said. “Both of those accelerated as the crisis deepened.”
In fact, commercial growth this quarter was driven by $52 billion in loan draws across all segments, he said. Wells Fargo has $26 billion in total commitments that are automobile related, with $17.4 billion of loans outstanding, according to the earnings presentation.
“We’ve been saying for some time that we’re late in the [credit] cycle,” Sharf said. “We’re going to stop saying that because now we’re early in the cycle.”
At Chase Auto, the portfolio inched up 0.48% year over year to $84 billion while originations, too, increased 5% year over year to $8.3 billion.
In fact, despite the year over year increase, March saw a “drastic” deceleration in consumer spending. As a result, origination volume dipped 2% compared with last quarter, JPMorgan Chase’s Piepszak said during the earnings call.
However, the bank did see a slight uptick in late payments as 30-day auto loan delinquencies increased 26 basis points year over year to 0.89% of the total portfolio, Piepszak noted. Yet, charge-offs decreased 5 basis points to 0.32% of the bank’s auto portfolio. JPMorgan Chase has approved payment deferrals for “hundreds of thousands of accounts in consumer lending,” she said.
Moving forward, the bank’s Chief Executive Jamie Dimon grit said that the consumer lending market will see a tightening of credit and an increase in spreads. “What banks won’t do is price gauge like you see with other [lenders],” he added.
JPMorgan Chase’s stock (NYSE: JPM) was trading down 2.15% at press time to $96.08 per share. Wells Fargo’s stock (NYSE: WFC) was trading down 3.69% at $30.26 per share at press time.
