U.S. banks are not hesitating to set aside billions of dollars in case of coronavirus-driven loan losses because it allows them to mask substantial increases in quarterly trading revenue, Mohamed El-Erian said Wednesday.
The chief economic advisor at Allianz acknowledged on CNBC that banks are certainly adding to their credit reserves in an anticipation of a wave of defaults related to the pandemic. “They expect, the IMF expects, everybody expects, the worst economic hit since the Great Depression.”
“But I also think, if you’ve made a ton of money on trading, you really don’t want to show massive profits right here,” El-Erian said on “Squawk Box.” “You don’t want to say, ‘Hey look I’m doing OK,'” while millions and millions of Americans have lost their jobs in recent weeks.
Major U.S. banks started issuing first-quarter earnings this week, and those reports have shown sharp increases in trading revenues due to the coronavirus-spike in financial market volatility. However, since the banks also increased their loan loss pools, earnings actually showed huge declines from last year’s January-to-March period.
Citigroup, for example, saw its quarterly trading revenues for both fixed income and equities rise 39% compared to last year. Trading revenues at JPMorgan Chase, Goldman Sachs and Bank of America were also strong. But per-share profits at Citi, Goldman and BofA all dropped about 40% in the first quarter, while JPMorgan saw its bottom-line number drop nearly 70%.
“It’s a good time to take loan loss provisions. So they’re both able and willing to take it,” El-Erian said.