JPMorgan, Citi Earnings Hint At (Some) Optimism On Credit Losses

Are we entering a new age of consumer conservatism – at least when it comes to debt management?

As earnings season kicks off, two of the biggest banks reported earnings that topped analysts’ expectations on the top and bottom lines. But drilling into the numbers, there were signs that consumers are proving resilient – and perhaps even proactive – when it comes to managing debt and other liabilities in an uncertain economy.

Those trends may bode well for individuals’ and families’ financial health on the other side of the pandemic, especially where, as PYMNTS has estimated, 60 percent of the population lives paycheck to paycheck.

J.P. Morgan reported earnings of $2.92 a share, leagues above the $2.23 projected by consensus, and its top line of $29.9 billion was better than the roughly $28.4 billion the Street had expected.

The key question for the quarter: whether American banks would show that they’re largely done setting aside money for loan defaults tied to the pandemic. That appears to be the case at J.P. Morgan, the biggest U.S. bank by assets, which had a $611 million provision in credit costs in the period, compared with $10.5 billion in the previous quarter.

Citi, for its part, said that earnings per share came in at $1.40, better than the 93 cents a share expected, while revenues of $17.3 billion topped the $17.2 billion expected.

But it was the movement in loan loss reserves – a barometer of how banks view borrowers’ behavior – that stood out in the third quarter. Both banks reduced loan loss reserves that had been previously built up through the pandemic. And in this environment, any action that runs counter to building those reserves may indicate that banks see at least some positive signs – namely, that a crushing wave of defaults, feared by many observers, is not in the offing.

J.P. Morgan reduced its loan loss reserves by $569 million, tied in part to its mortgage portfolio. As noted by CEO Jamie Dimon in the initial earnings release, the banking giant’s total loan loss reserve tally stands at $34 billion, relatively unchanged from the end of the second quarter.

Citi’s results showed that net credit losses were relatively unchanged year over year at $1.9 billion, though they also showed a marked decline from the second quarter’s tally of $2.2 billion.

J.P. Morgan noted that in the quarter, net charge-offs of $1.2 billion were down $191 million from the prior year, predominantly driven by the card segment. And in the card and auto segment, the bank saw some mixed activity: Total net revenue for consumer and community banking was $12.8 billion, down from just under $14 billion a year ago – but up from $12.2 billion in the second quarter of this year. The total provision for credit losses in this segment was $794 million, down from $5.8 billion in the second quarter, implying an improved outlook.

Citi’s global consumer banking segment showed total revenues of $7.2 billion, down 2 percent quarter over quarter. Card spending was down 5 percent to $4.3 billion. A reduction in card spending, coupled with more conservative outlooks for loan losses, implies that borrowers are being a bit more prudent about credit, and are doing what they can to manage their debt loads. Indeed, Citi’s average card loans stood at $147 million, down from $150 million in the previous quarter. 

As noted in this space in August, credit card debt shrank a bit (by $100 billion, as measured from February until June, or 11 percent, in the wake of trillions of dollars in stimulus payments). Extra money from the government helped individuals pay down debt. More recently, revolving debt — mainly credit card debt — declined by $9.4 billion in August compared to July. The figure now stands at its lowest level since 2017.

No concrete trends yet – and, of course, we’ll get more details from the earnings calls themselves – but J.P. Morgan and Citi are at least showing some signs of consumer resilience in the face of the pandemic.