American banks are bracing for profit cuts and recession

NEW YORK, Jan 10 (Reuters) – U.S. banking giants are expected to report lower fourth-quarter profits this week as lenders stockpile funds for rainy days to prepare for an economic slowdown hitting investment banking.

Four U.S. banking giants — JPMorgan Chase & Co ( JPM.N ), Bank of America Corp ( BAC.N ), Citigroup Inc ( CN ) and Wells Fargo & Co ( VFC.N ) — will report earnings on Friday.

Along with Morgan Stanley ( MS.N ) and Goldman Sachs ( GS.N ), they are the six biggest lenders expected to raise a combined $5.7 billion in reserves to prepare for bad loans, according to the average projections of Refinitiv. That’s more than double the $2.37 billion allocated a year earlier.

“With most U.S. economists predicting either a recession or a significant slowdown this year, banks are likely to include a more severe economic outlook,” Morgan Stanley analysts led by Betsy Grasek said in a note.

The Federal Reserve is aggressively raising interest rates in an effort to tame inflation near its highest level in decades. Rising prices and higher borrowing costs have led consumers and businesses to limit their spending, and because banks serve as economic intermediaries, their profits fall when activity slows.

According to preliminary estimates by Refintiva analysts, the six banks should also record an average 17% drop in net profit in the fourth quarter compared to a year earlier.

Reuters Graphics

Still, lenders will benefit from rate increases that allow them to earn more from the interest they charge borrowers.

Investors and analysts will focus on comments from bank chiefs as an important gauge of the economic outlook. A parade of executives have warned in recent weeks of a tougher business environment, prompting firms to cut pay or cut jobs.

Goldman Sachs will begin laying off thousands of employees starting Wednesday, two sources familiar with the move said on Sunday. Morgan Stanley and Citigroup, among others, also cut jobs following a decline in investment banking activity.

The moves come after Wall Street dealers in mergers, acquisitions and initial public offerings face a sharp decline in their business in 2022 as rising interest rates roil markets.

Global investment banking revenue fell to $15.3 billion in the fourth quarter, down more than 50% from the previous quarter, according to data from Dealogic.

Consumer businesses will also be a key focus of the banks’ results. Household accounts have been propped up throughout much of the pandemic by strong labor market and government stimulus, and while consumers are generally in good financial shape, more are falling behind on their payments.

“We are coming out of a period of extremely strong credit quality,” said David Fanger, senior vice president of the financial institutions group, at Moody’s Investors Service.

At Wells Fargo, the fallout from the fraudulent accounts scandal and regulatory fines will continue to weigh on results. The lender had expected to book a charge of about $3.5 billion after agreeing to settle allegations of widespread mismanagement of auto loans, mortgages and bank accounts with the U.S. Consumer Financial Protection Bureau, the largest civil penalty ever handed down by the lender. organization ever said.

Analysts will also be watching to see if banks such as Morgan Stanley and Bank of America reserve a $13 billion loan write-down to finance Elon Musk’s purchase of Twitter.

More broadly, the KBV index (.BKKS) of banking stocks is up about 4% this month after sinking nearly 28% over the past year.

While market sentiment has swung from hope to fear in 2022, some big banks could overcome the most dire predictions as they cut back on risky activities, Credit Suisse analyst Susan Roth Kacke wrote.

“We see more resilient earnings power through the cycle after a decade of de-risking,” she wrote in a note. “We cannot dismiss the fundamental strength.”

Reporting by Saeed Azhar, Niket Nishant and Lananh Nguyen Editing by Nick Zieminski

Our Standards: Thomson Reuters Trust Principles.

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