NEW YORK (Reuters) – U.S. banking giants are expected to report lower fourth-quarter profits this week as lenders hoard money for rainy days in preparation for an economic slowdown that will hurt investment banking.
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 report earnings on Friday.
Along with Morgan Stanley (MS.N) and Goldman Sachs (GS.N), they are two of the six largest lenders expected to accumulate combined reserves of $5.7 billion to prepare for non-performing loans, according to the Refinitiv median forecast. This is more than double the $2.37 billion allocated a year ago.
“With most US economists expecting either a recession or a significant slowdown this year, banks are likely to consolidate sharper economic forecasts,” Morgan Stanley analysts led by Betsy Grasek said in a note.
The Federal Reserve is aggressively raising interest rates in an effort to tame inflation near its highest levels in decades. Rising prices and rising borrowing costs have prompted consumers and businesses to reduce their spending, and since banks act as economic intermediaries, their profits fall when activity slows.
The six banks are also expected to average a 17% decline in net profit in the fourth quarter from a year earlier, according to preliminary analyst estimates from Refintiv.
However, the lenders will benefit from the higher interest rates which allow them to earn more interest which they charge the borrowers.
Investors and analysts will focus on comments from bank chiefs as an important gauge of the economic outlook. A parade of CEOs has warned in recent weeks of a tougher business environment, prompting companies to cut compensation or cut jobs.
Two sources familiar with the move said Sunday that Goldman Sachs will start laying off thousands of employees starting Wednesday. Morgan Stanley and Citigroup, among others, have also cut jobs after investment banking declined.
The moves come after Wall Street dealmakers from mergers and acquisitions and initial public offerings faced a sharp decline in their 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 year-ago quarter, according to data from Dealogic.
The consumer business will also be a major focus of the banks’ results. Household accounts have been propped up for most of the pandemic by a strong job market and government stimulus, and while consumers are generally in good financial shape, more are starting to default on payments.
“We’re exiting 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 the fake accounts scandal and regulatory penalties will continue to weigh on results. The lender expected to foreclose about $3.5 billion after it agreed to settle charges related to widespread mismanagement of auto loans, mortgages and bank accounts with the US Consumer Financial Protection Bureau, the largest civil penalty ever.
Analysts will also be watching whether banks like Morgan Stanley and Bank of America book any writedowns on the $13 billion loan to fund Elon Musk’s purchase of Twitter.
More broadly, the KBW (.BKX) index of bank stocks is up about 4% this month after falling about 28% last year.
Susan Ruth Katzke, an analyst at Credit Suisse, writes that while market sentiment took a sharp turn from hope to fear in 2022, some large banks could weather the worst forecasts as they abandoned risky activities.
“We see more resilient strength in earning on the cycle after a decade of risk-free,” she wrote in a note. We can’t rule out the underlying force.
(Covering) Saeed Azhar, Nikit Nishant, and Lanan Nguyen Editing: Nick Zieminski
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