Bank financial results can be a good leading indicator for the economy. Unlike say GDP or unemployment, which are backwards-looking indicators and tell us what has already happened. Also, unlike your favourite youtube conspiracy theory expert or blogger, banks literally put their money where their mouth is.
Loss provisions for unpaid credit card debt, loan and mortgage defaults, and other bad debt tell us how much banks think they are going to lose, in the future. If they get this wrong it can be a massive hit to the share price, worse it can lead to insolvency, similar to the Wirecard collapse. Even worse, and you have a financial crisis on your hands. Yet this metric is often underappreciated.
‘When America sneezes, the rest of the world catches a cold’
This week four largest banks in the U.S expressed optimism that the worst of the COVID-19 impact on the U.S. economy is behind them.
JPMorgan, in particular, gave us a glimpse of the optimism by releasing $569m of its credit reserves, implying the outlook for the economy is much better than considered just a few weeks ago. The firm has a large retail and consumer presence in the U.S, as well as a global Corporate and Investment Bank operating in Europe, Middle East, Africa and Asia. In July they put aside $10.47bn, but in September the figure was only $611m. This was far below the prediction of $2.4bn.
This is stunning mainly because it’s actually below the provisions they made this time last year when there was no pandemic and no recession. It’s also similar to the 3-year average. It’s almost as if COVID-19 never happened…
One of the reasons why defaults have remained low is due to lenders’ forbearance programs and government stimulus efforts, and bank have warned that the effects could drag on for years.
However, JPMorgan also warned that defaults are unlikely to peak until Q2 2021.
“The medium to longer-term is still highly uncertain, in particular as it relates to future stimulus,” she said. “So we remain heavily weighted to our downside scenarios.” – JPMorgan
Let’s not forget there is a big difference between the impact on households and businesses, front line workers and white-collar workers, and between homeowners and those who rent.
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