US banks are getting ready for a lackluster earnings season as market turbulence decimated trading activity, lower investment banking revenues are not the only culprit in shrinking profits this year across the industry.
The country’s six largest banks are estimates allocated approximately $4.6 billion last quarter to cover potentially bad loans — that is, funds set aside to allow for uncollected loan payments in the face of recession expectations. economy increased.
JPMorgan Global Market Strategist Jordan Jackson told Yahoo Finance Live on Wednesday: “We expect another quarter of loan defaults to increase. “This will be the sixth consecutive quarter that banks have decided to accumulate provisions for loan defaults and that will act as a drag on overall bank earnings.”
This marks a sharp reversal from last year, when the bank’s balance sheet benefited from the issuance of loss benefits from the time of COVIDreserves accumulated at the start of the pandemic to absorb the potential shock of a borrower default.
As the economy recovered faster than expected, the big Wall Street banks began releasing those reserves, providing a meaningful stepping stone to earnings.
For example, in the third quarter of 2021, JPMorgan Chase (JPM), has seen quarterly revenue rise by more than $2 billion as it continues to free up reserves previously earmarked for possible pandemic debt. The bank’s profit of $11.69 billion at the time would be $9.59 billion without it $2.1 in reserve releases.
With recession expectations underway, inflation remaining high, and savings accounts backed by fiscal stimulus tests drying up, banks are preparing a line of defense in the market. Some customers are unable to pay off their loans in full.
“There are a lot of banks that take a slightly more conservative approach,” explains Jackson. “Every analyst and market participant is calling for a recession in 2023, so I think the banks just want to shore up their balance sheets before that.”
Among those market participants is JPMorgan CEO Jamie Dimon, the head of the largest US bank by assets, who said earlier this week that the economy could be in recession by the middle of next year.
And over the past few months, Dimon has highlighted difficulties such as the ongoing Russia-Ukraine war, inflation, declining consumer confidence and “unprecedented quantitative tightening”.
“These are very, very serious things that I think have the potential to push the US and the world – I mean, Europe is already in recession – and they have the potential to put the US in a recession of some sort in six or six years.” nine months from now,” Dimon said Monday in an interview with CNBC.
JPMorgan set aside $428 million in loan provisions for the second quarter and $902 million in those funds in the first quarter, according to the earnings report.
JP Morgan (JPM), Citi (OLD), Wells Fargo (WFC), and Morgan Stanley (TEACHER) is expected to report third-quarter results on Friday, with financing from Goldman Sachs (GS) and Bank of America (BAC) will expire next week.
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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