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Big banks lean on conservative projections for 2021 amid stimulus talk

Brian Cheung
·3 min read

The nation’s largest banks are baking in conservative forecasts into their growth projections for 2021, adding that the economic recovery this year will hinge largely on the impact of further stimulus from Washington.

On Friday morning, JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) reported earnings for the fourth quarter of 2020. The three banks said improvements in the economic outlook had allowed them to release almost $5 billion in reserves that the firms set aside last year to absorb loan losses.

Allowance for loan losses fell $2.5 billion at JPMorgan Chase, $1.5 billion at Citigroup, and $758 million at Wells Fargo.

But the three banks still have about $72 billion set aside in total reserves, almost double the amount of reserves that the three banks held pre-crisis.

Management at the three megabanks offered more optimistic outlooks on the economy in 2021, but made it clear that they were not comfortable enough with the path to recovery to release more reserves.

In response to a question from Yahoo Finance, JPMorgan Chase Chairman and CEO Jamie Dimon said there could be “cloudy” quarters to begin 2021.

Dimon’s statement alongside the company’s earnings release cautioned that the bank’s decision on releasing reserves factored in “multiple, multi-year hypothetical probability-adjusted scenarios, which may or may not occur.”

One major part of those scenarios: the size, scope, and efficacy of further stimulus. As talks in Washington progress, the Wall Street banks are making it clear that they would like to see fiscal support to buoy the economy through the vaccine rollout.

“We are supportive of that, not because it's good for the bank, but because it's good for American citizens,” Dimon said.

‘Bit of a question mark’

On Thursday, President-elect Joe Biden unveiled a $1.9 stimulus package that proposes direct payments to Americans and a $15 minimum wage, among other provisions.

The news was likely too recent for the banks to incorporate into their earnings forecasts, but Wells Fargo CFO Mike Santomassimo told reporters Friday that there is uncertainty about how effective the next round of stimulus will be in bridging the economy to a post-pandemic world.

“We hope so, but I think that’s a bit of a question mark,” Santomassimo said.

Wells Fargo’s reserve release was by far the smallest among the three megabanks to report on Friday. But Santomassimo said he was comfortable with the level of reserves given the “whole range of scenarios that could potentially play out.”

Citigroup CFO Mark Mason offered optimism on fiscal support coming soon.

“There are a lot of favorable indicators that support the direction of the variables and make for a more positive outlook,” Mason told reporters Friday.

On the company’s earnings call, Mason added that extra help would support the broad ability to repay among Citi borrowers. But Mason said the economy still faces a “downside scenario,” warning that there is the possibility that losses peak in 2022, specifically in the bank’s U.S. consumer businesses.

“We’re all trying to figure out whether the lower delinquencies and lower level of losses that we’ve seen thus far is a delay or a deflation of losses,” Mason said. “And only time will tell.”

The last of the nation’s big four banks, Bank of America (BAC), is scheduled to release its earnings on Tuesday, Jan. 19.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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