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Big banks could see $71 billion in loans sour after coronavirus shock

The novel coronavirus has already caused unemployment around the U.S. to surge and the stock market to tumble. Now the pain is spreading to the banking industry, with lenders this week reporting that they expect tens of billion in loans to sour.

The nation's four largest banks — Bank of America, Citigroup, JPMorgan Chase and Wells Fargo — say the financial stress caused by the pandemic could cause borrowers to default on upwards of $71 billion in debt. The disclosures came as part of the biggest banks' quarterly earnings announcements. Profits plunged at all four banks, another sign of the nation's financial troubles.

The banks said the projected loan losses were as of March 31 and that their estimates factor in the impact of the government's various economic relief plans. That means the current loan-loss estimates only reflect the economic damage of the first few weeks of the coronavirus shutdown, and have probably grown in the ensuing two weeks. New York, the worst-hit state, didn't officially shutter businesses until March 22.

As large as the bank losses loom, some analysts said the banks may be understating the damage. "These are all guesses at this stage," said Octavio Marenzi of consultancy firm Opimas in an email to investors. "The credit risk models created by banks have never seen anything like this crisis and are not likely to be able to make accurate forecasts."

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The bank facing the biggest potential losses is JPMorgan Chase, which has set aside a reserve for bad loans of $23 billion alone. The financial giant is also the nation's largest lender, with just over $1 trillion in loans at the end of the first quarter. That means it's projected loan losses amount to only 2.3% of its total loans. 

The bank with the largest percentage of its loans facing possible default is Citi, with $20 billion in projected bad debt, or 2.9% of its total loans. Wells Fargo, with a reserve of $11.2 billion, could see 1.1% of its total loans go bad.

Yet while bank losses are expected to pile up, the financial system is not likely to face the type of crisis that crippled the industry in 2008. For instance, the Office of Financial Research's Financial Stress Index is at 5.1 — that's down from 10 at the end of March and well below the 25 reading it would have been at the peak of the financial crisis. (The index was launched in 2017.)

And despite large drops in their bottom lines, all of the banks were still in the black. JPMorgan earned $2.8 billion, down 70% from the $9 billion it earned in the year-ago quarter. In addition, not all of the loan losses are directly tied to the coronavirus. At the end of last year, banks were already expecting more than $43 billion in loan losses. 

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Still, the pandemic was the main driver pushing those projected losses up $28 billion, the biggest quarterly jump in bad debt at the banks in years. More worrying is that the large loan losses suggest that many consumers will struggle. 

Banks and government relief efforts have allowed many borrowers to delay interest payments on mortgages, student debt and other loans. But experts say that loan relief is not likely to last as long as the current economic downturn.

One of the biggest problem areas is credit card debt, which banks — unlike with mortgages or student loans — have not been mandated to delay payments. JPMorgan Chase said it expects that as much as $15 billion in credit card debt will go unpaid. 

The Associated Press contributed to this report.

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