“We feel good about our efforts to support our customers as they navigate unexpected financial challenges during these unprecedented times”, American Express CEO Steve Squeri said Friday, in perfunctory comments attached to the company’s second quarter results.
“We remain confident in our ability to effectively manage credit risk to achieve the best outcomes for both our customers and our shareholders”, Squeri added.
That’s great. But profit tumbled some 86% for the quarter, and you can probably guess why. Here’s a (visual) hint:
Provisions for losses in the period were $1.6 billion, driven by a $628 million reserve build. That’s roughly double the $861 million from the same period a year ago. To be fair, that’s down substantially from the first quarter, when provisions more than tripled on-year, but it still reflects preparations for what many expect to be a deluge of missed payments, defaults, and other credit events associated with the medium- to long-run impact of the worst downturn in a century.
The company cited “the deterioration of the global macroeconomic outlook”, and although AmEx said spending volumes hit a nadir in April before “gradually improv[ing] in May and June”, card spend looks to have been down sharply over the quarter.
Despite what Squeri called “resilience” among small businesses, both anecdotal and more systematic evidence suggest those businesses are closing their doors for good, and at a stepped up pace in light of new lockdowns.
AmEx’s results should further underscore the urgency of the situation for lawmakers on Capitol Hill.
I realize it’s something of a broken record at this juncture, but the evidence is overwhelming that the relief delivered thus far will prove insufficient to sustain the recovery in the world’s largest economy.
Remember, JPMorgan, Wells Fargo, Citi, and Bank of America, set aside more than $33 billion for losses between them during the second quarter.
On Friday morning, reports indicated that discussions around Republicans’ proposal for the next virus relief package had stalled.
If banks have to err on one side or the other, it is better to over rather than under reserve based on estimates at this point in time.
Six months from now, for the sake of the country, I hope that hind sight does not indicate that the banks/cc companies under reserved.
There is not nearly enough discussion of how the regulators have changed rules around loan loss provisions. They are no longer provisioning when the losses occur, but in advance based on their expectations. The debate is whether this is pro-cyclical or not. You could argue that if they over do it, then they could increasing lending more in the future. Would love to see more analysis on this subject.