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Investment
Banks brace for major loan losses

Three of the United States' biggest banks have set aside approximately $40 billion (US$28 billion) to brace for COVID-19 related loan losses, as Wells Fargo posts its first quarterly loss since the Global Financial Crisis.

Citigroup saw its net income dive 73% from the previous period, driven by a substantially higher allowance for credit loss reserves (US$26.4 billion, compared to US$12.5 billion at June 2019), while JP Morgan Chase reported a $10.5 billion loan loss provision for the quarter.

Wells Fargo reported a net loss of US$2.4 billion and will reduce its dividend per share by more than 80% (from 0.51c per share to 0.10c). It has provisioned US$9.5 billion for loan losses as it braces for significant defaults in the months ahead.

Wells Fargo chief executive Charlie Scharf, appointed late last year as part of the bank's transformational strategy, said he was extremely disappointed by the results.

"We are extremely disappointed in both our second quarter results and our intent to reduce our dividend," he said.

"Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter.

"While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our performance regardless of the operating environment."

In comparison, JP Morgan chief executive Jamie Dimon said the bank's "fortress" of a balance sheet allows it to "remain a port in the storm".

"Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy," he said.

"We ended the quarter with massive loss absorbing capacity - over US$34 billion of credit reserves and total liquidity resources of US$1.5 trillion, on top of US$191 billion of CET1 capital, with significant earnings power that would allow us to absorb even more credit reserves if needed.

"This is why we can continue to serve all of our stakeholders and to pay our dividend - unless the economic situation deteriorates materially and significantly."

The bank earned US$4.7 billion in net income in the quarter, despite building US$8.9 billion in credit reserves. It's AUM for its wealth management offering grew 15%, with US$124 billion in net inflows into liquidity and long-term products, as Americans pivoted to protect their wealth against market volatility.

Meantime, despite Citi's net income declining 73% for the quarter, its revenues increased 5% from the prior-year period thanks to strong performance in its fixed income markets (68% increase) and investment banking businesses.

Citi chief executive Michael Corbat said the results come despite consumer banking revenues slowing significantly during the crisis.

"While credit costs weighed down our net income, our overall business performance was strong during the quarter, and we have been able to navigate the COVID-19 pandemic reasonably well," he said.

"We continued to add to our substantial levels of liquidity and our balance sheet has plenty of capacity to serve our clients.

"With a sharp emphasis on risk management, we are prepared for a variety of scenarios and will continue to operate our institution prudently given this unprecedented situation."

Read more: Wells FargoCOVID-19Global Financial CrisisUnited StatesJP Morgan ChaseCharlie ScharfCitigroupJamie DimonMichael Corbat
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