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JP Morgan and Citigroup surprise in lending business

ZAt the start of the reporting season for American companies for the third quarter, the American bank JP Morgan Chase caused a bang on Tuesday. Despite the Corona crisis and contrary to the forecast of the stock analysts, who had predicted an average profit decline of around 20 percent, JP Morgan increased its net profit. With 9.4 billion dollars (8.0 billion euros), it was in the third quarter of 2020 by 4 percent above the net profit of the same quarter of the previous year.

Competitor Citigroup, on the other hand, reported a 34 percent decline in profits to $ 3.2 billion. But even with this news, this bank, which is more represented in the credit card business, surprised positively. Because stock analysts had expected Citigroup on average with a profit decline of 60 percent.

Why JP Morgan Citi is stealing the show

Nonetheless, JP Morgan Chase clearly stole the show from rival Citi with her nearly ten billion dollar profit. “Investment banking is still an important driving force for our bank,” said JP Morgan’s CEO Jamie Dimon about the business figures. The surprise for both JP Morgan and Citi this quarter is less in the capital markets than in the lending business. Here, JP Morgan succeeded in risk provisioning for bad loans not only compared to the previous quarter, when many loans suddenly threatened to default due to the corona pandemic, but also took a positive turn compared to the same quarter of the previous year. Things didn’t go quite as well for Citi, but she didn’t need much more risk provisioning than a year ago.

Companies need banks to raise capital

As in the first half of the year, JP Morgan and Citi also made splendid earnings in the third quarter in the business of placing stocks and bonds and in securities trading. JP Morgan’s earnings in stock and bond trading increased by around 30 percent compared to the same quarter of the previous year, and that of Citi by almost 20 percent. However, this was roughly also expected, because many companies have financing requirements in view of falling sales in the Corona crisis, which they cover by selling new shares and bonds with the help of banks. And more securities will be traded on the stock exchanges if the prices only fall low, as in March, and then recover rapidly, supported by the lower interest rates of the central banks, as happened in recent months.

Both make the tills of investment banks like JP Morgan and Citi ring.
However, there was little economic support for businesses and consumers in the United States compared to Europe. Many companies in the fracking industry, for example, had already gone bankrupt in the second quarter. And many consumers who lost their jobs because of the Corona crisis could no longer service their credit card debt. This led to bank loan defaults. JP Morgan, for example, had to set aside $ 10.5 billion in loan loss provisions for bad loans in the second quarter, while Citi’s loan loss provisions had soared to $ 15 billion.

In the third quarter, the credit business situation for JP Morgan and Citi has stabilized noticeably. For bad loans, JP Morgan set up loan loss provisions of 611 million dollars, which is almost a billion less than in the third quarter of 2019, when no one suspected a corona crisis. And Citi only had to set aside 1.9 billion dollars in loan loss provisions after the last horror quarter, little more than in the third quarter of 2019.

The burden of lower interest rates

However, the fall in interest rates had a negative impact on the lending business. Thus, JP Morgan’s total capital markets and lending revenues remained roughly the same at $ 29.9 billion. Citi boss Michael Corbat even said that the negative effects in the credit business from the Corona crisis hit more strongly than the positive ones in the capital market business. In fact, Citi’s earnings fell 7 percent overall to $ 17.3 billion.

There were also opposing effects in terms of costs: while the lower risk provisions relieved the burden, legal disputes burdened both banks. In September, the US financial regulator JP Morgan had fined $ 920 million for alleged price manipulation in precious metal and bond contracts. Citi was fined $ 400 million for deficiencies in risk management.

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