Bank of America caps off a disastrous Q1 reporting season for the financial sector. | Image: HECTOR RETAMAL / AFP
- America’s major banks have all posted large falls in Q1 profits, as they set aside several billions for potential loan losses.
- With American businesses and consumers sitting on almost $30 trillion in debt, banks should expect to lose more than a few billions.
- Ultimately, coronavirus could cause America’s huge debt bubble to burst.
Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS) and Citigroup (NYSE: C) have recorded near-50% falls in their first quarter profits. Yes, that’s right. The coronavirus pandemic didn’t kick in until the end of March, but the banks’ profits have virtually halved as they set aside billions for potential loan losses.
But with corporate debt in the U.S. standing at around $15.5 trillion, the coronavirus pandemic could result in loan losses much larger than a few billion.
Businesses are complaining about the difficulty of obtaining federal government support. So with the coronavirus effectively shutting down much of the U.S. economy, it could result in the bursting of a massive debt bubble.
Bank of America Profits Fall Because of Loans and Coronavirus
Reporting Wednesday morning, Bank of America announced that it set aside $3.6 billion to cover potential losses from non-payment of debt. As a result, its first-quarter profits plunged 48.5%.
Tuesday was even worse. JP Morgan (NYSE: JPM) and Wells Fargo (NYSE: WFC) reported 69% and 89% dives in Q1 profits, respectively. Both banks set aside a total of $10.6 billion to cover losses on loans.
These precautions come after American businesses have rushed to draw additional credit in the face of the escalating coronavirus pandemic. According to Morgan Stanley, businesses claimed $144 billion in a single week in March.
The latest earnings calls are likely to pale in comparison to reports from the next three quarters of the year.
That’s because coronavirus is not going away anytime soon. Donald Trump has suggested that the lockdown could last until August. Researchers have even suggested that measures will have to be in place until 2022.
Even banks themselves are revising their own projections downwards. Goldman Sachs has predicted a 34% drop in U.S. GDP in Q2, having previously indicated a 24% decline. Meanwhile, Bank of America has forecast a cumulative decline of 10.4% across the next three quarters.
This works out to a drastic reduction in the ability of American businesses and consumers to repay loans. Given that American business owe around $15.5 trillion, loan losses may eventually reach the trillion-dollar mark or higher.
Banks aren’t going to cover such losses by putting aside a few billion. And when you remember that American consumers also owe around $14 trillion, it’s clear that the coronavirus could be an existential threat to many banks.
Yes, Congress has passed a $2 trillion stimulus package that earmarks $350 billion in loans to businesses. But businesses are reporting difficulties in applying, while banks aren’t sure how to operate the system.
Likewise, there are reports that the $1,200 stimulus checks are being delayed because Donald Trump wants his name printed on them. Also, with a maximum of 80 million people eligible, a total value of $96 billion probably isn’t enough to cover $14 trillion in debt.
Bursting Debt Bubbles and Financial Crashes
Together, all of this points to a cataclysmic failure in the ability of American businesses and consumers to serve trillion-dollar debts.
So while banks have just seen their profits cut in half after putting aside a few billion, expect them to make losses in the following quarters.
They’ll write off tens or hundreds of billions in loans. And with it, not only could America’s gargantuan debt bubble burst, but we may even end up seeing bank failures and a serious financial crisis.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Sam Bourgi.
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Last modified: April 15, 2020 2:37 PM UTC