Drawings on lines of credit peaked. Will the banks be reimbursed?

America’s biggest banks weathered the rush for corporate cash as the novel coronavirus began to shut down the economy last month.

Bankers are now faced with the question: how will all this new debt issued for large and medium-sized companies fare before a recession?

A total of $231.2 billion has been drawn on revolving credit lines across the industry since March 5, Goldman Sachs’ research team said in a note to clients released earlier this week. The rush caused a surge in first-quarter loan growth at banks.

Bank of America reported $60.3 billion in revolver drawings on existing business lines in the first quarter, including a $34 billion increase in the third week of March. Withdrawals slowed to $4 billion in the week ending April 3.

“Imagine the speed and ability that our team [showed] to absorb the demands so quickly and fund them during the quarter,” Brian Moynihan, president and chief executive of Bank of America, said on his company’s earnings conference call on Wednesday.

Tuesday, JPMorgan Chase brought in more than $55 billion in drawdowns from revolver lines of credit in March alone, starting from scratch for the entire month of February as the virus began to spread relatively undetected in the United States, according to financial documents.

At the $543 billion U.S. Bancorp in Minneapolis, commercial line drawdowns peaked in the third and fourth weeks of March, when borrowers drew another $22 billion, executives said on a call Wednesday to discuss profits. Those draws have since slowed, and the company now expects line draws to total about $8 billion over the next 90 days, chief financial officer Terry Dolan said in an interview.

US Bancorp executives have no credit quality concerns about the drawdowns, Dolan added.

“The lines were generally from high-quality, higher-quality clients who had commercial paper facilities and needed a safety net for these short-term programs, and/or companies who wanted to increase their liquidity to to manage more difficult operations. times,” he said.

PNC Financial Services Group in Pittsburgh, with $445.5 billion in assets, saw an increase of nearly $25 billion in commercial loans in the first quarter, largely due to drawdowns on lines of credit.

“Over the past few weeks and into April, we’ve seen the loan drawdown rate normalize,” PNC president and chief executive William Demchak said in a Wednesday call with analysts.

The levies managed by PNC spanned all industries, but Demchak noted that the bank had issued $2 billion in new loans for hospitals battling the COVID-19 outbreak. The company expects loan balances to remain high for some time.

Goldman Sachs’ loan book jumped 17% from Dec. 31 to $128 billion three months later as business customers dipped into existing lines of credit, the banking giant said Wednesday. Companies that don’t have an investment-grade rating were more likely to dip into their credit lines at Goldman than those that do, the company said. Still, Chief Financial Officer Stephen Scherr said the withdrawals were in line with Goldman’s expectations for a time of economic stress.

There are fears that credit may eventually tighten as the effects of the economy begin to take hold and other sources of financing dry up.

“You will see a credit crunch in the market,” JPMorgan Chase Chairman and CEO Jamie Dimon said on the company’s conference call Tuesday. “Think about leveraged loans, some underwriting, some non-bank lenders that are no longer there. So you will see a possible tightening and a possible increase in spreads.

US Bancorp and PNC joined their biggest rivals in reporting steep declines in profits as they built up reserves to guard against future defaults on their loans.

US Bancorp said its net profit fell 31% from a year earlier to $1.2 billion. In addition to low interest rates, the company increased its provision for loan losses by $600 million to account for potential economic fallout from COVID-19.

The company isn’t particularly concerned about its own commercial real estate portfolio, Dolan said. But he said he expects some types of properties, such as hotels and retail stores without strong e-commerce capabilities, to struggle even after stay-at-home orders begin to decline.

“When we look at the broader industry, I think lodging, hotel and motel properties will definitely be more challenging, especially for an extended period, as customers have to get back to wanting to be travel-ready. “said Dolan.

“For offices, I think it’s still too early to know,” he added. “Are employees and businesses shifting to more mixed working from home or not? I think that’s a big question mark.

PNC’s profits fell 28% from a year earlier to $915 million. The company recorded a provision for loan losses of $914 million, with 55% of the amount related to its commercial portfolio.

Executives pointed to $19.3 billion in business and commercial real estate loans that were affected by the shutdown, led by $4.4 billion in loans to restaurants, casinos, hotels and convention centers – totaling around 1.6% of PNC’s portfolio.

Goldman set aside $937 million for credit losses in the first quarter, up sharply from $224 million a year earlier.

Goldman offered a relatively optimistic forecast on Wednesday for when the U.S. economy will begin to rebound. But even in this scenario, in which the economy recovers about half of its lost output in the second half of 2020, the pain will be immense for many companies.

The company’s exposure to the oil and gas sector, which has been battered by weak demand in recent weeks, is an area of ​​particular focus, Scherr said.

“I think for anyone running a business, you have to plan on the assumption that we’re going to operate in a recession through 2020, through 2021,” Goldman Chairman and CEO David Solomon said during the interview. company’s quarterly earnings call.

According to Goldman forecasts, US gross domestic product is expected to decline more than 30% in the second quarter. For the full year, the New York investment bank expects a contraction of around 6%.

But Solomon acknowledged that economic modeling is particularly difficult right now, and he said the current climate creates a lot of uncertainty for business owners.

“We can all have economic forecasts and we can all talk about the economic consequences,” he said. “But unless people feel safe and confident around the virus, the economic impacts will continue one way or another. It’s a very, very difficult thing to predict.

Solomon said he gave customers very simple advice.

“I tried to encourage the companies we spoke to, and individuals for that matter, to hope for the best but plan for the worst,” he said.

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