US banks brace for lower profits and recession

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

Four US banking giants – JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N), Citigroup Inc (CN) and Wells Fargo & Co (WFC.N) – will release their results on Friday.

Along with Morgan Stanley (MS.N) and Goldman Sachs (GS.N), these are the six largest lenders that would need to accumulate $5.7 billion in reserves to prepare for downgraded loans, according to Refinitiv’s average projections. That’s more than double the $2.37 billion set aside a year earlier.

“With most U.S. economists predicting either a recession or a significant slowdown this year, banks will likely price in a harsher 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 bring inflation under control near its highest level in decades. Rising prices and higher borrowing costs have prompted consumers and businesses to cut spending, and because banks serve as economic intermediaries, their profits shrink when activity slows.

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 estimates from analysts at Refintiv.

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Yet lenders have everything to gain from rising rates that allow them to get more out of the interest they charge borrowers.

Investors and analysts will focus on bank bosses’ comments as an important indicator of the economic outlook. A parade of leaders in recent weeks has warned of a tougher business environment, which has prompted companies to cut pay or cut jobs.

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

The moves come after Wall Street traders handling mergers, acquisitions and IPOs faced a sharp drop in business in 2022 as rising interest rates rattled markets.

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

Consumer businesses will also be at the heart of banks’ results. Household accounts have been supported through much of the pandemic by a strong job market and government stimulus, and while consumers are generally in good financial shape, others are starting to fall behind on payments. .

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

At Wells Fargo, the fallout from a fake account scandal and regulatory penalties will continue to weigh on results. The lender expected to book an outlay of around $3.5 billion after agreeing to settle accusations of widespread mismanagement of auto loans, mortgages and bank accounts with the US Consumer Financial Protection Bureau, the largest civil penalty ever imposed by the watchdog.

Analysts will also be watching whether banks such as Morgan Stanley and Bank of America book writedowns on the $13 billion loan to fund Elon Musk’s purchase of Twitter.

More broadly, the KBW index (.BKX) of banking stocks is up around 4% this month after falling nearly 28% last year.

As market sentiment shifted from hope to fear in 2022, some big banks could ride out the bleakest forecasts because they backed off from risky business, wrote Credit Suisse analyst Susan Roth Katzke.

“We are seeing more resilient earning power through the cycle after a decade of risk reduction,” she wrote in a note. “We cannot reject the fundamental force.”

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

Our standards: The Thomson Reuters Trust Principles.

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