US banks prepare for shrinking profits, recession

US banks prepare for shrinking profits, recession
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NEW YORK, Jan 10 (Reuters) – U.S. banking giants are forecast to cut their fourth-quarter profits this week as lenders stockpile rainy-day funds to prepare for the economic slowdown that hit investment banking.

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

with Morgan Stanley (MS.N) and Goldman Sachs (GS.N)According to Refinitiv’s average projections, these are the six largest lenders expected to accumulate a total of $5.7 billion in reserves to prepare for diminishing loans. That’s more than double the $2.37 billion allocated a year ago.

“While most US economists predict a recession or significant slowdown this year, banks will likely adopt a more serious economic outlook,” Morgan Stanley analysts led by Betsy Graseck said in a note.

Federal Reserve raise interest rates It is in an aggressive effort to bring inflation closer to its highest level in decades. Rising prices and rising borrowing costs voluntary consumers and businesses their profits fall when activity slows, as they cut spending and banks serve as economic intermediaries.

All six banks are expected to report an average of 17% year-on-year decline in net income in the fourth quarter, according to preliminary analysts from Refintiv.

Reuters Charts

Still, lenders continue to profit from rising rates that allow borrowers to earn more on the interest they charge.

Investors and analysts will focus on bank bosses’ comments as a key indicator of the economic outlook. In recent weeks, a number of executives have warned firms of the more challenging business environment, which slash compensation or eliminate jobs.

Goldman Sachs will start laying off Thousands of employees as of Wednesday, two sources familiar with the move said on Sunday. Morgan Stanley and Citigroup, among others, also posted layoffs following a decline in investment banking activity.

The moves come after Wall Street deal makers, interested in mergers, acquisitions and IPOs, faced a sharp decline in their business in 2022 as rising interest rates churned the markets.

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

Consumer businesses will also be a major focus in banks’ results. Household accounts have been bolstered for much of the pandemic by a strong job market and government stimulus, and while consumers are generally well off financially, more are starting to lag behind in payments.

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

At Wells Fargo, the consequences of the fake account scandal and regulatory penalties will continue to weigh on the results. The lender is expected to set aside an expense of approximately $3.5 billion from now on. accepted the deal Accusations of widespread mismanagement of car loans, mortgages, and bank accounts before the U.S. Consumer Financial Protection Bureau are the watchdog’s largest ever civil penalty.

Analysts will also watch whether banks like Morgan Stanley and Bank of America have made any impairments on the $13 billion loan to finance Elon Musk. Buying Twitter.

More generally, the KBW index (.BKX) Bank stocks are up nearly 4% this month after falling nearly 28% last year.

As the market sentiment takes a sharp turn from hopeful to fearful in 2022, Credit Suisse analyst Susan Roth Katzke wrote that some of the biggest banks may be overcoming the most dire forecasts as they give up risky activities.

“After a decade of risk reduction, we see more resilient earnings strength throughout the cycle,” he wrote in a note. “We cannot ignore fundamental strength.”

Reported by Saeed Azhar, Niket Nishant and Lananh Nguyen Editor Nick Zieminski

Our standards: Thomson Reuters Trust Principles.

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