U.S. banks maintain capital strength: Moody’s

Despite a sharp increase in credit provisions amid the fallout from Covid-19, Wall Street’s big banks maintained their capital strength in the second quarter, Moody’s Investors Service says.

The rating agency reported that the big five Wall Street firms — Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley — generated aggregate pre-tax profits of $18.5 billion (all figures in U.S. dollars) in the second quarter, down 43% from the same quarter a year ago but up 29% from the first quarter of 2020.

“The coronavirus pandemic hit income statements during the quarter via sharply higher loan loss provisions and compressed net interest margins, but also set off a gusher of trading and underwriting revenue,” Moody’s said.

Against this backdrop, firms bolstered their strong liquidity positions while boosting credit provisions and their capital ratios, it noted.

The big five increased loan loss provisions by $20.9 billion in the quarter, Moody’s said.

Yet the firms reported stable to improving regulatory capital ratios compared with the first quarter, as they halted stock buybacks and actively managed risk-weighted assets (RWAs).

Market rebounds also helped stabilize asset-based fee income, Moody’s said, and firms recorded robust trading revenue (up $14.2 billion) “reflecting substantially increased client activity and widened bid/ask spreads.”

It also noted that, so far, consumer asset quality has remained steady, “due in part to government relief programs,” but that firms saw some weakening in corporate asset quality during the quarter.

“As the economic implications of the pandemic unfold, the [firms] will need to continue balancing earnings pressure, customer forbearance and support for the economy against the need to maintain capital and liquidity strength,” Moodys said.

At this point, the banks “are reasonably well placed to weather a downturn this year,” Moody’s noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.