Weekly News Digest 17 April 2020

Perhaps no quarterly earnings reports have ever been as closely studied as those released by JPMorgan Chase and Wells Fargo this week, the first major banks to publish a detailed overview of how the pandemic is affecting their balance sheets. The key numbers are certainly stunning, with Wells Fargo profit about a tenth of what it was in the first quarter last year. The country's largest bank, JPMorgan Chase, did comparatively better on that metric, with year-on-year profit falling by just over two thirds. Wells' revenues from credit card fees were down six percent over the prior year period, but the consumer default phase of the crisis has yet to kick off, leading both banks to set aside colossal sums by way of reserves against expected losses, which is where the big hit to profitability in this reporting round originated.

Preparation for forthcoming loan losses also upended the quarterly earnings of Citigroup and Bank of America, whose reports came out the day after their major competitors. Citi's chief financial officer Mark Mason said in an accompanying conference call that credit card business fell by 30 percent in the last week of March, a pressure that has continued into the current month. For the quarter just ended, Citigroup earnings fell by 46 percent and loan loss reserves were beefed up by $4.9 billion. At 45 percent, BofA's decline in earnings was much the same as Citigroup's, with close to $5 billion in loan-loss provisions set aside as the probability of a defaults spike grows.

That rush to build credit reserves is not only a measure to shore up balance sheets for a potential tsunami of soured business loans, but also to cushion lenders against losses in their credit card operations. In the case of JPMorgan Chase, credit reserves of $6.8 billion had to be set aside, with almost two thirds of that provision aimed at covering consumer loans – credit cards in the main. Unemployment figures are a revealing indicator of the industry's destiny in the United States: "As a rough rule of thumb," notes Reuters, "credit-card loss rates have matched the level of overall unemployment in crisis periods, so as joblessness passes ten percent, many card portfolios will stop making money." And the business model is not going to come under pressure for immediately upcoming quarters alone: consumers will probably emerge from the lockdown in much more bearish mood, inclined to avoid expenditure, just as they did for several years beyond the crash of 2008-09.

To provide a deeper understanding of what is happening to purchase behaviours in the United States, Argus, a Verisk Financial business, has created Covid-19 Spend Dashboards with data revealing impacts, indicators, and trends that can be viewed at nationwide, state or county levels and also broken down by merchant category, with further separations for in-store and online purchases if desired. Commenting on the year-on-year comparisons for March, Lorna Baek writes that "total spending took a sharp turn downward, with purchases reporting an 8.8 percent decline and transactions down by 12.3 percent ".

Lockdown life and virus avoidance have led to some big changes in payments preferences, most notably in what could fairly be described as the stampede to contactless in many countries that we have covered in this newsletter on several occasions in recent weeks. In India though, the payments environment has a further alternative to cash, the Unified Payments Interface, that now seems to be coming into its own as shoppers look to minimise the risks of physical interaction. As described in Verisk Financial Research's latest market update on India, UPI allows users to sidestep the necessity to procure the bank details of recipients: all that is needed is the appropriate mobile phone or ID number of the recipient. "Payment service providers are coming up with apps that alert consumers about merchants near them who use UPI," says the COO of the country's payments system operator. "Merchants are also sending across UPI IDs. These solutions were not popular earlier and have evolved just in the last few weeks."

To end, links to some other stories of interest this week...

Australia: Eftpos digital identity trial coming soon
Brazil: Central bank testing settlement of Pix instant payments
Europe: CaixaBank, Global Payments push prepaid card
US: American Airlines joins peers in loyalty adjustments
US: Major banks grant overdraft relief as stimulus cheques land