JPMorgan: Banks Will Need More Capital

Banks will likely experience about  $400bn more in losses, and stress tests will reveal the need for additional capital infusions for certain institutions according to research released by JPMorgan Chase & Co. (JPM). The report drawn up by a group of analysts for JPMorgan said total bank losses could reach a whopping $1.3trn. Banks so far have taken writedowns and losses of $920bn, which if the analysts’ estimates are correct, would mean banks are roughly 70% through with total losses. Going forward, the bulk of bank losses will come from loan books and less from securities portfolios, which have already gone through large writedowns, the report said. Most bank loans are not required to be marked-to-market, but, rather, reserves are set aside for expected loan losses to be realized in the next year or so. “Given the amount of losses still to come, we believe the system will need more government capital,” the analysts wrote. Although, “healthier institutions may not need more and may try to raise capital from the private sector.” In contrast, White House Chief of Staff and House Republican Leader Rahm Emanuel isn’t so sure. Emanuel told George Stephanopoulos in an interview Sunday he believes the government has the resources to make sure the 19 banking institutions are financially viable without going back to Congress for more money. Reports suggest officials at the Treasury, however, concur with JPMorgan’s analysis that certain banks will require additional capital to make them stronger . JPMorgan analysts also said banks should set aside an additional  $215bn in reserves against their holdings of $2.1trn of U.S. home loans that haven’t been packaged into securities. In the case of residential loans, if total expected losses are $300bn and banks have set aside $85bn in reserves for these loans, the group of mortgage bond analysts, lead by Matthew Jozoff, estimate there could be over $200bn left to go, or about half of total projected losses across all assets. Stress tests are scheduled for release May 4. And methodology behind the assessments is projected to be published April 24. The exam looks to evaluate 19 companies with more than $100bn in assets and their ability to withstand further economic downturn. In the past two weeks, banks including Citigroup Inc. (C), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) have reported better-than-expected first-quarter profits. While Emanuel doesn’t know the results of the stress tests, “What we do know is, in the first quarter, banks and the financial institutions are doing better. And I think we’re all pleased they’re reporting profits,” he said. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.