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Credit outlook brightens at big US banks as loan growth dims

Big U.S. banks reported a cascade of credit loss reserve releases in their fourth-quarter 2020 earnings, reinforcing the case that they just might be able to move past the dizzying pandemic-induced recession with relatively minor damage.

Executives said soft loan demand is likely to persist in early 2021, keeping spread revenue stuck in low gear. And credit loss cushions remain elevated as vaccine efforts race against the rapid spread of the coronavirus and the emergence of dangerous new variants.

But with the distribution of a new $900 billion dose of federal aid underway and U.S. President Joe Biden proposing $1.9 trillion more, banks entertained the possibility that dramatic loan losses might never materialize.

"It does feel like, at this point in this crisis, that the bridge has been strong enough," JPMorgan Chase & Co. CFO Jennifer Piepszak said about the bank's credit card customers on its earnings call. "The question that still remains is, is the bridge long enough?"

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Piepszak said the recently passed stimulus gives the bank some confidence, but added a note of caution, saying: "We have to get through the next three to six months." She said meaningful net charge-offs could still appear in the second half of 2021 or maybe later because of the recent relief package.

JPMorgan Chase's $2.9 billion reserve release was concentrated in its commercial portfolio — none was for credit cards. The story was similar at Citigroup Inc., where the institutional business accounted for the vast majority of a $1.5 billion reserve release, and CFO Mark Mason said the bank now does not expect peak consumer losses in the U.S. to hit until early 2022.

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Bank of America Corp. went further with an $826 million credit allowance reduction that was driven by credit card loans, and a prediction that card net charge-offs would decline after hitting a modest peak in the first quarter of 2021. "What people thought was sort of the analogy of a pig through a snake is probably more of a mouse through the snake," Chairman and CEO Brian Moynihan said on BofA's earnings call, attempting to draw a visual metaphor for borrower distress caused by the pandemic passing through successive stages of delinquency toward charge-off.

Criticized commercial loans at BofA did increase $2.96 billion from the third quarter to $38.67 billion, mostly because of exposure to hotels. But nonperforming commercial loans remained relatively low and CFO Paul Donofrio said losses would "be driven by really company-specific events that play out over the coming quarters."

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Wells Fargo & Co. also released $757 million of reserves but said the move was almost entirely driven by the sale of its $10 billion student loan portfolio. "We're seeing what everyone else is seeing, which is that [credit] performance is substantially better than we would have thought" at the onset of the crisis, President and CEO Charles Scharf said on the bank's earnings call. But executives have decided to maintain reserves until there is "more sustained and more equitable recovery because so many uncertainties exist."

Despite the reserve reductions, and negative credit provision expenses at each of the Big Four except BofA in the fourth quarter, credit allowances at the end of 2020 remain far higher than the year before. They also remain far higher than after additions at the beginning of 2020 because of the adoption of current expected credit loss accounting. Initial CECL levels, which reflected an economic outlook that did not anticipate a severe recession, could provide a rough guide for how much banks have left to release if charge-offs remain muted.

With long-term interest rates lifting off historic lows and the yield curve steepening, net interest margins did not deteriorate much further in the fourth quarter. BofA delivered on guidance that its net interest income bottomed out in the third quarter of 2020, and JPMorgan Chase raised its forecast for net interest income in 2021.

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But with net interest income in the fourth quarter down 6.4% to 17.2% across the Big Four year over year, banks have a lot of lost ground to recover and said they do not expect significant loan growth in the near term.

Wells Fargo forecast that its net interest income might be flat to down 4% in 2021 compared with an annualized fourth quarter, which represented the bank's weakest net interest income performance since 2008. CFO Michael Santomassimo said despite the recent rise in interest rates, they generally remain below yields for loans on Wells Fargo's balance sheet. The bank's projection also assumes that it remains constrained by an asset cap imposed by regulators over past consumer abuses.

JPMorgan Chase's forecast for 2021 net interest income of about $55.5 billion would be about 1% higher than in 2020 but still 4% below 2019.

Banks said factors like high levels of corporate liquidity, strong cash flows and tentative capital expenditure plans are continuing to restrain loan demand. But they did hold out hope that borrowing could pick up, perhaps substantially, in the second half of 2021 as the recovery matures.

"There is great potential in the second half of the year for a strong 2021, especially if there is another significant stimulus package," Scharf said.