America’s biggest banks will raise concerns about the US economy in third-quarter earnings reports starting next week, with analysts expecting them to set aside more than $4 billion to cover potential losses from bad debts.
Advance provisions will be far lower than those made by lenders at the start of the pandemic in 2020, when they increased their reserves by tens of billions of dollars to prepare for an economic shock that was largely averted thanks to containment measures. unprecedented monetary and fiscal stimulus. .
Now, as demand for loans continues to grow, banks are bracing for the possibility that rising interest rates will slow the economy and lead to higher loan losses – a concern that has already lowered bank stock prices this year.
“The overall economic outlook has deteriorated somewhat, so it would be natural to expect a gradual recovery in bank provisioning actions,” said Ken Usdin, banking analyst at Jefferies.
“At this point, there are not very high expectations for losses to increase anytime soon. But the bigger question is what the economy will look like over the next year to 18 months.
Based on analyst estimates compiled by Bloomberg. It would be the third consecutive quarter of loan loss provisions by banks.
Investors will also be looking to see if banks are marking losses on loans for leveraged buyouts that they have committed to fund but have not yet been able to sell to third parties. In the second quarter, banks suffered hundreds of millions of dollars in mark-to-market losses.
JPMorgan, Morgan Stanley, Citi and Wells Fargo will release their results on October 14, followed by BofA on October 17 and Goldman the next day.
The KBW Bank Index is down around 22% in 2022, compared to a decline of around 20% in the benchmark S&P 500. The decline reflects fears that more loans could deteriorate, although the rise Interest rates help lenders increase net interest income – the difference between what banks pay for deposits and what they earn on loans and other assets.
“Banking stock investors, a group that is never inclined to ‘seize the moment,’ are already seeing ‘good news’ and ‘worry that we are approaching the peak of earnings,’ the analysts at Autonomous Research wrote.
Bank executives said U.S. credit quality remains excellent, with defaults well below historical norms, and businesses and customers still sitting on cash built up during the pandemic.
At an industry conference last month, JPMorgan Chairman Daniel Pinto said, “The consumer here in the United States is in a very, very good position.”
Analysts also say that major U.S. banks — following Federal Reserve-sponsored stress tests and new capital requirements — are well positioned to weather an economic downturn.
“Banks are entering this period of uncertainty from a position of strength,” said Jason Goldberg, banking analyst at Barclays.
Under a methodology introduced in 2020 – called current expected credit losses, or “Cecl” – banks are required to build up reserves during good times in order to have sufficient capital reserves in case of losses.
“The difference in economic outlook at end-June compared to end-September has narrowed markedly. And so according to Cecl, reserve building needs to increase,” said Gerard Cassidy of RBC Capital Markets.
Analysts expect earnings per share for the six major banks to decline by an average of about 22% in the quarter.
Third-quarter revenues from JPMorgan, BofA, Citi and Wells are expected to rise about 4% year-on-year, benefiting from higher net interest income.
Goldman and Morgan Stanley, which derive a larger share of their profits from investment banking, are expected to see their revenues fall due to the slowdown in trading.
“Traditional investment banking is very weak. Equity markets are down quite significantly,” said Christian Bolu, analyst at Autonomous Research.
The cuts will reinforce banks’ focus on expense and workforce management.
Banks’ equity and bond trading divisions – amid volatile markets – are expected to continue their strong performance in the third quarter.
“Trading, broadly speaking, is expected to be up modestly from the third quarter of last year, which was a particularly strong quarter,” Barclays’ Goldberg said.
Additional reporting by Imani Moise