The only category in which spending had increased in April was groceries. In every other category—gas, travel, restaurants, retail and services, among others—spending was down by double digits. Retail and services, which together made up more than half of Discover customers’ spending last year, have fallen this month by 11 percent and 41 percent, respectively.
Wall Street has punished consumer lenders like Discover the most over fears of the contagion’s effect on the economy. But, ultimately, commercial lenders will feel it, too, with many businesses dependent on consumer spending along with—indirectly—the businesses that supply them.
An important accounting change for banks took effect at the beginning of the year that required them to model for expected losses over the lifetime of their loans rather than the old method of projecting losses over the coming 12 months. The pandemic has made that exercise even more complicated than it was when the calendar turned, but it provides a window into current thinking about how bad this recession will be.
Wintrust, for example, now is one of the larger business lenders in Chicago. It bolstered its total loan-loss reserves to $253 million at March 31, 0.9 percent of its total loan portfolio. During the worst three years of the Great Recession and its aftermath for Wintrust—2009 through 2011—it averaged net annual losses of 1.2 percent of its total portfolio.
Keep in mind this modeling was as of March 31, and unemployment has skyrocketed since then. With trillions in federal assistance to consumers and businesses aimed at staving off the worst for 60 days, “time is stopping for two or three months,” Wintrust CEO Edward Wehmer told analysts.
After that? What is the pace at which furloughed or laid-off workers are rehired or find other jobs? Will significant segments of the economy, like hotels and restaurants, remain more or less frozen? Bankers acknowledge that if the economy doesn’t return to something resembling normal in the summer, their outlook for losses likely will worsen.
Chicago is Cincinnati-based Fifth Third’s largest single market following its purchase last year of Chicago-based MB Financial. Its loan portfolio is more vulnerable to hard-hit industries than Wintrust’s is and is more conventional, so it expects higher loan losses. But its projections are similar in comparison to the worst of the Great Recession.
“In our minds, the current fiscal and monetary policies are likely to cushion the second- and third-quarter impacts, but are not going to be necessarily providing a significant support in the latter years,” Chief Financial Officer Tayfun Tuzun told analysts on April 21. “So our reserve levels, as conservative as they are at 2.13 percent, do reflect a slowly recovering economy rather than a V-shaped recovery.”
In the meantime, most business banks have considerably more exposure to their existing roster of borrowers than they did even a few months ago. Toward the end of March, clients scrambled to access what was left on their credit lines as they built cash cushions.
The effect was felt even at Northern Trust, whose modest business-lending business belies its status as Chicago’s largest locally headquartered bank. Loans spiked 20 percent to nearly $38 billion from Dec. 31 to March 31, with much of that growth happening in March. That’s the highest level of loans Northern has had on its books in well over a decade—and maybe ever.
Northern Trust, which focuses on wealth management and services to investors rather than lending, didn’t reserve as though much had changed, however. Reserves as a percentage of total loans were 0.4 percent, just a bit above 0.33 percent as of Dec. 31.
Chief Financial Officer Jason Tyler noted to analysts that the reserve calculation was made using an end-of-March assumption of 10 percent unemployment. With such a moving target during this fastest-moving of downturns, he acknowledged, “that’s not it.”