U.S. Banks Brace for Shrinking Profits, Recession

By Saeed Azhar and Niket Nishant

NEW YORK (Reuters), – U.S. banks giants are expected to report lower fourth quarter profits as lenders hold onto rainy-day funds in preparation for the economic slowdown.

On Friday, four American banking giants, JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co., will report their earnings.

They are expected to be joined by Morgan Stanley and Goldman Sachs as the six largest lenders. According to Refinitiv, average projections show that they will have $5.7billion in reserve to cover soured loans. This is more that twice the $2.37billion set aside last year.

“With most U.S. economists forecasting either a recession or significant slowdown this year, banks will likely incorporate a more severe economic outlook,” In a note, Betsy Graseck, Morgan Stanley analyst, stated that.

In an attempt to control inflation, the Federal Reserve is increasing interest rates aggressively. Higher borrowing costs and rising prices have caused consumers and businesses alike to reduce their spending. Since banks act as economic middlemen and their profits drop when activity slows, they are forced to raise interest rates aggressively.

Preliminary estimates from Refintiv indicate that the net profit of six banks is expected to drop by 17% in the fourth quarter, compared with a year prior.

Graphic: Expected drop in profits at big U.S. banks in Q4 https://www.reuters.com/graphics/USA-BANKS/dwvkdarqjpm/chart.png

Lenders stand to benefit from rising interest rates, which allow them to make more money from the interest they charge to borrowers.

Analysts and investors will pay attention to the comments of bank bosses as a key indicator of the economy’s future. In recent weeks, a parade of executives warned of the harsher business environment that has led to firms cutting compensation and eliminating jobs.

Two sources familiar with the situation said that Goldman Sachs would begin to lay off thousands of employees starting Wednesday. After a slump in investment-banking activity, Citigroup and Morgan Stanley, among others, also laid off employees.

The Wall Street dealmakers involved in mergers, acquisitions and first public offerings experienced a sharp fall in their business in 2022 due to rising interest rates.

According to Dealogic data, global investment banking revenue fell to $15.3 billion for the fourth quarter. This is more than half of what it was a year ago.

The bank’s focus will be on the performance of consumer businesses. A strong job market and government stimulus have supported household accounts during the pandemic. While consumers are generally in good financial condition, many are falling behind in payments.

“We’re exiting a period of extraordinarily strong credit quality,” David Fanger is the senior vice president of financial institutions at Moody’s Investors Service.

The fallout from the fake accounts scandal at Wells Fargo and regulatory penalties will continue weighing on Wells Fargo’s results. The lender anticipated an expense of $3.5 billion following the settlement of charges relating to widespread mismanagement of car loans and mortgages.

Analysts will also monitor if Bank of America or Morgan Stanley book writedowns of the $13-billion loan used to finance Elon Musk’s purchase of Twitter.

The KBW Index of Bank Stocks is now up about 4% after falling almost 28% over the past year.

Market sentiment changed from optimistic to fearful in 2022. However, some large banks may be able to overcome the worst predictions, according Susan Roth Katzke, an analyst at Credit Suisse.

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

(Reporting by Saeed Azar, Niket Nishant, and Lananh Nguyen; Editing: Nick Zieminski