U.S. banks get ready for shrinking profits and recession

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

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

Along with Morgan Stanley ( MS.N ) and Goldman Sachs ( GS.N ), they are the six largest lenders expected to muster a combined $5.7 billion in reserves to service soured loans, according to an average projection by Refinitiv. That was more than double the $2.37 billion set aside a year earlier.

“With most US economists predicting either a recession or a significant slowdown this year, banks are likely to compound the worsening economic outlook,” Morgan Stanley analysts led by Betsy Graseck said in a note.

The Federal Reserve is raising interest rates aggressively in an effort to tame inflation near its highest level in decades. Rising prices and higher borrowing costs have prompted consumers and businesses to rein in their spending, and since banks function as middlemen in the economy, their profits decline as activity slows.

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The six banks are also expected to report an average 17% drop in net profit in the fourth quarter from a year earlier, according to preliminary analyst estimates from Refintiv.

Reuters graphic

However, lenders stand to profit from rate hikes that allow them to earn more than the interest they charge borrowers.

Investors and analysts will focus on the bank boss’s comments as an important gauge of the economic outlook. A march of executives has warned in recent weeks of a tougher business environment, which has prompted firms to cut compensation or eliminate jobs.

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

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The move comes after Wall Street dealmakers who handle mergers, acquisitions and initial public offerings face a sharp drop in their business in 2022 as rising interest rates weigh on markets.

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

Consumer business will also be the main focus in the bank’s decision. Household accounts have been supported for much of the pandemic by a strong job market and government stimulus, and while consumers are generally in good financial shape, more are starting to fall behind on payments.

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

At Wells Fargo, the fallout from the fake account scandal and regulatory penalties will continue to weigh on results. The lender expects to book expenses of about $3.5 billion after it agreed to settle charges related to widespread mismanagement of car loans, mortgages and bank accounts with the US Consumer Financial Protection Bureau, the largest civil penalty ever handed down by the watchdog.

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Analysts will also watch if banks such as Morgan Stanley and Bank of America book any write-downs on a $13 billion loan to finance Elon Musk’s purchase of Twitter.

More broadly, the KBW index (.BKX) of bank shares is up about 4% this month after falling nearly 28% in the past year.

Even as market sentiment shifts sharply from hope to fear in 2022, some big banks could weather the most dire forecasts as they shed risky activities, writes Susan Roth Katzke, an analyst at Credit Suisse.

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