Stimulus Postpones the Inevitable: Big Banks’ Earnings Reports Portend Further Economic Upset

PTA Research |

In the midst of the COVID-19 pandemic and an unpredictable economy, understanding real-time consumer behavior has become all the more critical for the survival of small and mid-size businesses (SMBs). JPMorgan and Capital One’s Q2 earnings, recently released, provide unique visibility into consumer spending trends with a wealth of data points which support further economic upset. Additionally, both firms project greater uncertainty for the economy writ large, and SMBs in particular, as the government begins to pare down stimulus programs. The current and forecasted consumer trending combined with the economic effects of the COVID-19 pandemic having been softened by government stimulus suggest that we may be dealing with these effects for a longer timeframe and on a more severe scale than previously predicted.

JPM

JPMorgan reported that credit card sales volume was down by 23% year-over-year while personal savings rates have been on the rise, peaking at 32.2% in April. Changes in consumer behavior has also resulted in a $176 million net loss (including reserve builds of $4.6 billion by JPMorgan’s consumer and community banking (CCB) segment) as compared to a net profit of $4.2 billion a year ago. The main decrease in credit card volume came from rapid declines in spending for travel, restaurants, and retail. Card sales volume in supermarkets, discount stores, and wholesale clubs initially rose in the early stages of the pandemic but subsequently returned to pre-pandemic levels.

Source: JPM Q2 Earnings Call Presentation

Though credit card sales on aggregate have dropped significantly year-over-year, they have been consistently, but conservatively, trending upward since reaching their low in April, showing signs of returning consumer demand. Jennifer Peipszak, CFO of JPMorgan, was notably bullish on future consumer spending, stating on the earnings call, “I think we will continue to see very, very strong year-on-year growth, both for wholesale and consumer in the latter part of this year.” Her optimism was not without justification as data shows home lending and retail purchases have already recovered to well above pre-COVID levels in June. The bank is actively spurring consumer spending by lifting minimum payment requirements for credit card customers. Despite the general uncertainty surrounding the economy, JPMorgan CEO Jamie Dimon remains confident that the firm’s “fortress balance sheet” positions the bank to endure virtually any situation—especially in comparison to 2008.

However, the aforementioned positive developments have been distorted by the temporary benefits of the federal government’s stimulus initiatives for businesses and consumers. Dimon expanded on the unique attributes of the current economy, explaining during the earnings call that, “savings are up, incomes are up, home prices are up. So you will see the effect of this recession, you're just not going to see it right away because of all the stimulus.” Analysts expect future quarters to be even more damaging to the bank’s consumer banking division, and the consensus is split on which force will be the greater driver for the negative trend: unemployment pushing  consumers to save more or  near zero-interest rates eating into net interest margins and loan payments. 

COF

In contrast, Capital One’s reserves for bad debts is based primarily on an economic forecast derived from the consensus of third-party economists. That forecast includes unemployment in the second quarter of 16.9% falling to 11.5% at the end of 2020 and gradually improving over the course of 2021 to end at 8.1%. Credit performance has benefited from prudent choices made before the economic downturn, with consumers behaving cautiously and paying down debt. Capital One reported a 15.5% decline in purchase volume compared to the prior-year quarter. 

The government stimulus has drastically altered the normal relationship between the unemployment rate and consumer credit in the short-term. As a result, Capital One’s strong credit performance so far shows that the normal relationship between unemployment and consumer credit has been significantly altered by lending hardship programs and especially by government stimulus, including direct consumer support through the CARES Act. Capital One does not forecast further benefit from another stimulus. 

Although both banks are reporting lower spending rates by consumers, and projecting lower profits, these trends are notably occurring in an economy bolstered by a $2.2 trillion economic stimulus bill. Unemployment has remained historically high with 14.7 million either laid off or furloughed (April 2020). Thus, while the benefits of the stimulus bill fade, and coronavirus cases continue to rise, the economy—at least without a second stimulus package—may be seeing grimmer days ahead.

Written by PTA Research.