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Banks will see big profits as “bad” loans become “good”

NEW YORK (AP) – The country’s largest banks are expected to generate large returns in the first quarter amid new confidence that consumers and businesses affected by the epidemic will be able to repay their debts and start borrowing again.

Brighter forecasts allow banks to move billions of dollars worth of “bad” loans into “good” piles, known as loan loss issues. The outbreak has forced banks such as JPMorgan Chase and Bank of America to set aside billions of dollars to cover possible bad loans.

The amount invested in these pools is not small. Across the banking industry, large and small banks, a collective $ 120 billion has been disbursed to cover these loans, according to the Federal Deposit Insurance Corporation. And much of it, about $ 40 billion, was provided by the country’s largest financial institutions.

These funds, once released, are added to the bank’s principal when they report their quarterly earnings.

Many banks are expected to report significantly improved results compared to the first quarter of 2020. JPMorgan is expected to make a profit of $ 3.09, compared to a profit of 78 cents a share a year ago, according to FactSet. Bank of America is expected to make a profit of 66 cents per share, compared to 40 cents a share last year.

Banks have big incentives from the government to thank for the improvement, as well as for the recovering economy, less default than expected. Trillions of dollars have been spent in the United States simply to keep individuals “businesses” afloat in the form of “Payment Protection Plans.” Numerous studies have shown that Americans use at least some of their aid to pay off debts or get into debt, including one from the New York Federation, which found that one in three American households uses incentive payments to pay off debt. : ,

Moreover, the government has allowed banks to be more flexible in determining which loans are considered bad or not, allowing for longer repayment periods, which in turn keeps some loans out of the “bad” pile.

The US economy grew by 4.3% in the fourth quarter of last year, compared to 4.9% in the first quarter, according to FactSet. Employers hired at a rapid rate in March. As more people are vaccinated, costs are expected to increase.

“I have little doubt that (stimulus), huge deficit spending, moreover (Federal Reserve assistance), a potential new infrastructure bill, a successful vaccine, euphoria at the end of the epidemic, that the US economy is likely to grow. Said Amy Dimon, CEO and CEO of JPMorgan Chase, in a letter to shareholders last week.

Bank shares reflected investors’ expectations for improved conditions. Since October 1, the index of KBW Bank, which tracks the shares of two dozen major US banks, has risen by 66%.

Banks have already begun to release some loans from the bad pile, as the outlook for the economy has improved. In the fourth quarter, JPMorgan Chase pulled $ 1.89 billion out of its $ 20 billion gross outstanding during the epidemic. Citigroup moved about $ 1.5 billion out of its reserves last quarter.

Banks are expected to spend some time on these issues of loan loss reserves, possibly by the end of 2022, according to UBS analysts. This is mainly because the economic recovery is likely to take at least a year, the banks do not want to release all funds in one shot.

While loan loss reserves are rocking banks, investors will also be scrutinizing interest rates on non-interest income this quarter. The Federal Reserve cut interest rates to zero to boost the economy at the start of the epidemic, which in turn made it more difficult for banks to raise interest rates on loans they borrowed.

For example, in the first quarter of 2020, Bank of America earned $ 16.1 billion in interest income. According to FactSet, this figure will be $ 10.3 billion this quarter.

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