Loan Credit Quality Holding Up Well, But Banks Face Other Challenges
(4 min read)
All things considered, the economic recovery post Covid lockdown has been stronger than many analysts expected a few months ago. The CARES Act did much to shield people and businesses from the worst of the lockdowns and economic collapse. The labour market is still in shambles, but consumer spending and housing – two engines of US GDP – are above pre-Covid levels, and purchasing manager surveys suggest that Corporate America is back in business.
Add solid credit performance to the list. Third quarter bank reports from Citigroup (C) and JP Morgan (JPM) show virtually no hit yet to bank loan portfolios from realized loan losses. And despite numerous anecdotes of small businesses folding and millions of people on the brink of disaster financially, bankruptcies remain at pre-Covid levels.
Granted these are lagging indicators. And there are some warning signs that things will probably worsen in coming months. Whether that amounts to a modest uptick or something worse will probably depend on whether and when further stimulus legislation passes and how big it is.
Bank Loan Portfolios Show Little Sign of Stress
At this writing, JPM and C have reported third quarter earnings. Focusing on their loan portfolios, one standout is that charge-offs (or realized loan losses) for both banks remain at pre-Covid levels (Table 1). Both banks made massive additions to their loan loss reserves in the first and second quarters, causing loss reserves to jump roughly 2pp. But so far there is little sign of corresponding loan losses.
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