Please ensure Javascript is enabled for purposes of website accessibility

Here's Why JPMorgan Chase, Wells Fargo, and Citigroup Shares Are Falling Today

By Matthew Frankel, CFP® - Apr 15, 2020 at 12:22PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Earnings season hasn't been kind to the big bank stocks so far.

What happened

The stock market isn't having an excellent day on Wednesday. As of 11 a.m. EDT today, the Dow Jones Industrial Average and the S&P 500 index were both down by about 2.7%.

Among the worst-performing parts of the market was the financial sector, and the big banks are getting hit especially hard after reporting their first-quarter earnings. JPMorgan Chase (JPM 0.95%) and Wells Fargo (WFC 0.68%) are down by 5% and 6%, respectively, adding to their post-earnings losses, and Citigroup (C 0.20%) is down by 3.5% after reporting its earnings earlier today.

Young woman with shocked expression.

Banks are setting aside shocking amounts of money to cover expected defaults. Image source: Getty Images.

So what

To be clear, bank stock earnings weren't terrible. But then again, the U.S. economy was pretty normal for about two-thirds of the first quarter. JPMorgan's revenue dropped by just 3% year over year, while Citigroup's actually grew. And all three of these banks grew their loan and deposit portfolios when compared with the first quarter of 2019.

The thing that seems to be scaring investors more than anything is the massive reserve builds by these banks. In simple terms, banks always set money aside to cover expected loan defaults, but in good times, default rates are rather low. Some of the reserve numbers we're seeing, however, show that the banks are bracing for a massive wave of defaults:

  • JPMorgan Chase added $8.3 billion to its loan loss reserves. For context, this is $6.8 billion more than it set aside during the first quarter of 2019.
  • Wells Fargo set aside $4 billion to cover losses, $3.1 billion more than a year ago.
  • Citigroup added $4.9 billion to its reserves in the first quarter. It added just $20 million in the first quarter of last year.

Another point worth noting is that while most areas of consumer banking are likely to do poorly during the coronavirus pandemic, the same can't be said for some aspects of investment banking. Specifically, when markets get volatile, trading activity in both fixed income and equities tends to accelerate. In fact, JPMorgan Chase reported record trading revenue during the first quarter, and keep in mind that the market was relatively stable until March. And the fact that many companies need to raise capital can be a positive catalyst for equity and debt underwriting as well.

This could explain why Wells Fargo is getting hit worse than the other two, since it is the only one of the three that doesn't have a significant investment-banking operation. In other words, it is dealing with the potential downsides of the crisis (higher loan losses, reduced demand, lower interest margins), without the silver lining of a boost to trading revenue.

Now what

The key takeaway from a bank investor's perspective is that nobody knows how this recession is going affect consumers' ability to pay their bills. And some of these reserve builds are more than investors had expected to see. Whether the actual losses experienced by these banks are more or less than the reserve amounts remains to be seen, but for now, investors seem to be taking a cautious approach.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
$54.18 (0.20%) $0.11
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$123.63 (0.95%) $1.17
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$46.06 (0.68%) $0.31

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.