Warren Buffett on covid-19-2020

Chenault's successor, Stephen Squeri, opened the Q2 2020 review by reporting that second-quarter revenues net of interest expense had fallen nearly thirty percent year over year, reflecting the collapse of travel-and-entertainment spend that historically accounted for a disproportionate share of Amex billings. Management told the call that the small-business and consumer services segments had partially offset the T&E collapse, and that the Company had moved aggressively during the quarter to defer marketing, reduce operating expenses and tighten underwriting on new accounts and on existing credit lines. CFO Jeff Campbell walked analysts through the $1.5 billion pre-tax credit provision taken during the quarter, of which approximately $1.2 billion represented reserve builds under the new CECL accounting regime. He flagged that the Company had suspended share repurchases during the quarter, retained capital to absorb the forward expected losses and continued to pay the common dividend, but would not restart buybacks until visibility on credit losses and T&E recovery improved. On the Q&A, analysts pressed on whether the COVID shock would structurally compress the T&E franchise in the way the post-9/11 shock had compressed corporate travel. Squeri argued that the early data from the May and June reopenings, especially the small-business and consumer services segments, suggested a faster recovery path than the post-9/11 trajectory and that the Company's premium Card Member cohort was holding spending better than the broader consumer. He also highlighted that the underlying merchant network had not contracted during the crisis, with the acceptance footprint expanding on net. The call closed with management declining to provide formal full-year guidance given the unresolved visibility on the pandemic path, but committing to a near-term priority of protecting the dividend, preserving capital and protecting the marketing investment behind the premium brand once the cycle turned.

Moynihan opened the Q2 2020 review by reporting net income of $3.5 billion despite absorbing roughly $4.2 billion of incremental credit loss provisions under the CECL accounting regime. Management told the call that the consumer deposit franchise had grown balances by more than twenty percent year over year, that the Paycheck Protection Program originations had reached approximately $32 billion across roughly 300,000 small-business borrowers and that the trading business had reported the highest quarterly revenue in nearly a decade on the volatility surge in March and April. CFO Paul Donofrio walked analysts through the reserve build, explaining that approximately $2.5 billion of the provision had been driven by the macroeconomic forecast adjustments under CECL rather than by actual delinquency migration. He flagged that net charge-offs had remained below pre-pandemic run-rate levels, that the loan deferral balances in the consumer and commercial books were beginning to roll off and that the Bank had continued to hold capital well above the regulatory minima, allowing the common dividend to be maintained even while share repurchases had been suspended. On the Q&A, analysts pressed on whether the Bank would need to build reserves further through the back half. Moynihan responded that the second-quarter build had been sized to reflect a macroeconomic baseline consistent with the consensus forecast and that subsequent builds would depend on whether the actual delinquency migration tracked the forecast. He also defended the decision to maintain the dividend, arguing that the Bank's earnings power through the cycle supported the distribution and that the Federal Reserve's guidance to suspend buybacks was the more meaningful constraint on capital return during the year. The call closed with management framing the next phase as a measured resumption of capital return subject to Federal Reserve guidance, while continuing to invest in the consumer mobile banking platform that had seen login activity grow more than twenty percent during the quarter and to support the broader Federal Reserve lending facilities as the standing balance sheet permitted.

CEO Michael Wirth opened the Q2 2020 review against the backdrop of the COVID-driven collapse in global oil demand during the second quarter, when WTI crude briefly traded at negative $37 per barrel in April. Management told the call that the Company had cut the 2020 capital program by approximately twenty percent to roughly $14 billion and that the operating expense run-rate had been reduced by approximately $1.4 billion on an annualised basis, while the common dividend had been raised for the thirty-third consecutive year. CFO Pierre Breber walked analysts through the capital allocation framework, indicating that the Company intended to defend the dividend through the downturn without issuing equity, fund the reduced capital program from operating cash flow and the balance sheet, and use the asset divestiture program to bridge the gap. He flagged that the Company's balance sheet had been built deliberately for environments like the COVID-driven collapse, with net debt at the bottom of the peer group range coming into the downturn. On the Q&A, analysts pressed on whether the Company would consider cutting the dividend as several peers had signalled. Wirth responded that the Company had committed to the dividend through the cycle and that the long-cycle project portfolio entering service through 2021 and 2022, especially the Permian unconventional and the Gulf of Mexico deepwater projects, would provide the cash flow growth to support the trajectory of dividend growth. He also pushed back on the suggestion that the Permian unconventional growth ambition should be moderated, arguing that the Company's position in the basin was the structural driver of long-term production growth. The call closed with management reaffirming the long-term framework of between three and four percent annual production growth into the mid-decade, anchored on the Permian unconventional, the Gulf of Mexico deepwater and the recently acquired Noble Energy portfolio in the Eastern Mediterranean, and committing to return essentially all of the operating cash flow net of capex to shareholders through the cycle once the price environment normalised.

Buffett opened the 2020 annual meeting in an empty Omaha arena, with Charlie Munger absent in person and the meeting conducted by video link against the backdrop of the COVID-driven market collapse of March 2020. Buffett told shareholders that Berkshire had deployed approximately $5 billion into the public equity market during the March collapse, had sold off approximately $4 billion of equity holdings to fund the deployment and had taken a $9.8 billion writedown on the Kraft Heinz investment reflecting the structural pressure on the packaged-food franchise. Buffett walked shareholders through the broader context, acknowledging that the COVID-driven collapse in airline demand had led Berkshire to sell the entirety of its airline equity positions - the holdings in Delta, United, American and Southwest - during April. He framed the airline sale as a recognition that the underlying business model had been changed by the pandemic in ways that were not yet visible, and that the disciplined response was to exit rather than to attempt to time a recovery that he had no edge in forecasting. On the Q&A, shareholders pressed on whether Berkshire should be deploying more aggressively into the post-COVID collapse. Buffett responded that Berkshire had not seen opportunities at the scale and the terms available in 2008, that the Federal Reserve's rapid intervention had effectively crowded out the natural buyers of crisis capital and that the Company would continue to carry a very large cash position until attractive opportunities emerged. He also defended the decision to sell the airline positions, arguing that the underlying industry economics had been structurally weak for the entire history of commercial aviation and that the pandemic had crystallised the structural disadvantage. The meeting closed with Buffett reiterating the long-term framework of compounding intrinsic value per share, anchored on the insurance float, the wholly-owned operating businesses and the discipline of carrying large cash reserves through bull markets to deploy through panics, and signalling that the succession planning for the CEO role was being executed against the long-stated plan with Greg Abel as the designated successor.