US banking giants report gloomy earnings despite strong trading
New York: Turmoil in financial markets created some profitable opportunities for large banks in the first quarter, but results released Wednesday underscored the darkening prospects for the US economy.
Trading divisions at large banks garnered boom-like revenue jumps, while banks also benefitted from a deluge of high-quality companies seeking to raise debt.
But results from Citigroup, Bank of America and Goldman Sachs highlighted the industry's clear belief that the US is heading into a recession.
All three banks set aside large sums of money in case of bad loans, significantly denting profits and reflecting expectations for potentially major defaults amid deep uncertainty over how long the coronavirus shutdowns will last.
The measures follow similar announcements Tuesday from JPMorgan Chase and Wells Fargo, as executives try to assess how much lift the US economy will get from unprecedented support from Washington as the coronavirus crisis rages.
Goldman Sachs Chief Executive David Solomon is telling clients "to hope for the better, but plan for the worst," he said during a conference call with analysts.
"We can all have economic forecasts and we can all talk about the economic consequence of this, but unless people feel safe and secure and confident around the virus, the economic impact will continue in some way, shape or form," Solomon said.
For many clients "it's still going to feel like you're operating in a recession," potentially well into 2021, even if the US economy is not technically in recession during all of that time, Solomon said.
Range of gloomy scenarios –
Citigroup has been testing its loan book against a wide array of economic scenarios, including ones where unemployment reaches 15 percent and US growth contracts by as much as 40 percent, said Chief Financial Officer Mark Mason.
"We would imagine those would be severe-type scenarios," Mason told reporters on a conference call, "but we're in touch across our firm to make sure we can manage that."
Mason said the bank's credit card business saw a decline of 30 percent in sales at the end of the March and "we've continued to see that pressure play through in April."
Citigroup set aside around $7 billion in the first quarter in case of defaults, leading to a 46 percent drop in profits to $2.5 billion. Revenues rose 12 percent to $20.7 billion.
Mason said the bank could delay some spending, such as marketing for credit cards, depending on how conditions evolve.
Bank of America, the biggest US bank by assets after JPMorgan Chase, set aside $4.8 billion for potential defaults, $3.6 billion of which was added in the first quarter.
Bank of America reported quarterly profits of $3.5 billion, down 48.4 percent from the year-ago period.
The bank has received requests from some one million clients who have sought deferrals, about 80 percent on credit cards.
About 16 percent of Bank of America's small business clients have sought deferrals accounting for nearly one-third of the balances for that program, the bank said in an investor presentation.
"We view it as a recessionary outlook," said Paul Donofrio, chief financial officer of Bank of America. "None of the scenarios that we're looking at is for anything other than a recession."
Feast or famine -
Meanwhile, Goldman Sachs reported profits of $1.1 billion, down 49 percent from the year-ago period. Revenues dipped one percent to $8.7 billion.
Goldman set aside $937 million during the quarter to deal with potential defaults, citing "continued pressure in the energy sector and the impact of the Covid-19 on the broader economic environment."
The shock from the coronavirus crisis had a feast-or-famine impact of many of Goldman's divisions.
On the positive side, the firm enjoyed double-digit revenue boosts to fixed income and equity trading, and won the bank "significantly higher" revenue in corporate lending and underwriting.
But Goldman suffered an operating loss in its asset management business due to losses in equity and debt investments.
The firm also saw a big drop in revenues tied to financial advising for corporate mergers. - AFP
Shares of Citigroup fell 3.6 percent to $43.80 and Bank of America tumbled 6.3 percent to $22.23, while Goldman Sachs added 0.2 percent at $178.51.