“Particular categories you’d expect were impacted: travel was down roughly 75% while dining and entertainment were down 60%”, Citi CFO Mark Mason said Wednesday, on the conference call following the bank’s Q1 earnings. “We’ve continued to see that pressure play through April. We also saw pressure in our commercial cards”.
During the last week of March, Mason said the bank witnessed card spending plummet 30% in the wake of lockdown protocols, business closures and various other containment measures implemented to avert a worst-case scenario from the COVID-19 outbreak.
That’s a worrying statistic, although it’s hardly surprising. Data out Wednesday showed US retail sales plunging an unprecedented 8.7% in March, while Bank of America’s Q1 report betrayed a “softening in credit and debit spend that began mid-February and accelerated in late March as stay-at-home orders affected a majority of Americans”.
Citi’s consumer unit boasts the biggest credit card portfolio on the planet. Firm-wide, the bank reported a $4.9 billion loan loss reserve build for Q1, taking the total cost of credit to more than $7 billion for the quarter. That was up from $2.2 billion in Q4 and just under $2 billion during Q1 of 2019.
Of that $4.9 billion build, more than $2.8 billion came in the consumer business.
Across business lines, the bank tripled its loan loss allowance. Compared to December, Citigroup’s total allowance for credit losses (including the CECL transition impact and the Q1 build) rose by $8.6 billion, from $14.2 to $22.8 billion.
For what it’s worth, the bank’s traders had a helluva quarter, especially in FICC, where revenue jumped 39% to $4.79 billion, the best quarterly performance in eight years. Overall, trading revenue was up 37% to $6.5 billion.
When it comes to the provisions for credit losses, this is just the thunder. Citi card purchases were flat YoY at $128 billion, for example. Consumer banking revenues in Asia were down just 4%. Citi mentions “lower revenues in cards, reflecting lower sales volumes due to COVID-19″, but you get the feeling the brunt of this storm – rain, hail and damaging winds – will show up in the second quarter results.
Michael Corbat said as much. “We managed our expenses with discipline and had good revenue performance as the economic shocks caused by the pandemic weren’t felt until late in the quarter”, he remarked, before calling COVID-19 “a public health crisis with severe economic ramifications”.
As Bloomberg put it Wednesday, “Citi’s figures show it’s bracing for an onslaught of defaults in its sprawling credit card business all the way up to the financing the firm provides to major corporations”.
Speaking of that financing, Citi was kind enough to break out its unfunded exposure to the energy sector, which is struggling with what the IEA on Wednesday called “the worst year in the history of global oil markets”. Here’s what that exposure looks like:
Of course, thanks in part to the Fed, things are looking brighter even for high yield energy, the poster child for the current credit crunch.
“The spread on US high-yield energy debt has recovered to 14.66 percentage points from 23.1 percentage points on March 20”, Bloomberg’s Sebastian Boyd noted on Wednesday.
(BBG)
Although Boyd sees some fundamentals-based hope in the futures curve (even as spot prices are languishing near $20), you’d certainly be forgiven for suggesting that when it comes to the snapback tighter in credit spreads (and this goes for pretty much everything other than CCCs), the Fed’s corporate bond buying plans are the main source of optimism.
And yet, despite unprecedented stimulus from Congress and an implicit promise from the Fed to make everyone whole, this week’s results from the big banks show they’re hunkering down for an expected deluge of defaults and missed payments from borrowers running the gamut from Joe card holder to small business owner to corporate clients coping with a black swan.
On the bright side for consumer spending, there is one category of goods experiencing an unprecedented boom. Grocery store sales surged 27% in March as Americans stocked their doom bunkers for the viral plague.
That could be a one-off, though, and not because people won’t want groceries next month. Rather, it’s possible that disease prevention efforts may soon mean there are no more groceries to buy.
Just ask Ken Sullivan, who is terrified at the prospect of a future without bacon.
The food factories producing everything from milk and cheese, bread and pasta, to meat and canned fruit and vegetables are a deer in the headlights and need immediate help. If they close the farmers go bust. That would be really bad for us all. The Feds have dropped the ball on this. They should be right up there with the medical corps in importance with keeping us alive. They should be getting testing and whatever PPE is required to keep the food going onto the trucks. The National Guard may be making bacon and canning peas. Hey Pense, how did you guys miss this one?
Wisconsin farmers dumping milk on fields as fertilizer should scare us shitless… that’s an insane waste of food. Can you imagine the economic impact of actual famine in the United States? Even shortages of staples like milk, cheese, ice cream and pork would have crazy repercussions.