- Big lenders to begin reporting Q2 results on Thursday (July 14)
- The four biggest banks could record $3.5 bln of provisions for reserves-analysts
- Investors seeking clues on recession outlook
Second-quarter profits at major U.S. banks are estimated to drop intensely from a year ago on increased loan reserves, as the pandemic recovery is succeeded by a likely recession.
Analysts predict JPMorgan Chase & Co will post a 25% decline in profit on Thursday, while Wells Fargo & Co and Citigroup Inc will display 42% and 38% profit drops, respectively on Friday, according to Refinitiv I/B/E/S data.
Bank of America Corp, which like its peers has large consumer and business lending franchises, is foreseen to display a 29% decline in profit when it posts on July 18.
The fall in profit arises from lenders increasing their reserves for anticipated loan losses, a turnaround from a year ago when they profited from cutting their cushions as expected pandemic losses failed to take place and the economy strengthened.
“It’s going to be a shaky quarter for the sector,” said Jason Ware, chief investment officer for Albion Financial Group, which holds shares in Morgan Stanley (MS.N) and JPMorgan.
Investors will want to listen to executives’ insights into the strength of the economy and if borrowers are “shakier now,” Ware said.
Banks ought to factor the economic outlook into loan loss reserves under an accounting standard that came into effect in January 2021.
While data on Friday showed the U.S. economy gave more jobs than forecast in June, it could still be on the brink of a recession. Gross domestic product shrank in the first quarter, with tepid manufacturing readings and consumer spending in the past two weeks.
TIME TO BUILD UP
In June, JPMorgan CEO Jamie Dimon cautioned of an economic “hurricane,” while Morgan Stanley CEO James Gorman has said there is a 50% possibility of a recession.
“The banks are going to have to build up their reserves,” said Gerard Cassidy, a bank analyst at RBC Capital Markets.
Wells Fargo, JPMorgan, Bank of America, and Citi, the country’s biggest four lenders, could register $3.5 billion of loss provisions in comparison to $6.2 billion of benefits in 2021 when they released reserves, Cassidy estimated.
As a result, the banks’ bottom lines will seem grimmer than their underlying businesses. Pre-provision, pre-tax profits for the big four will drop only by 7%, according to forecasts by analysts led by Jason Goldberg at Barclays.
To be certain, banks are also increasing reserves for additional loans they have been making as companies have begun to borrow more and consumers have been using credit cards to eat out and travel again. And actual loan losses and delinquency rates are still close to record lows.
Nevertheless, bank executives have said more loans will be written off. Analysts will push the banks for clues on the magnitude and timing and how much they might ultimately negate gains in net interest income – the difference between banks’ cost of funds and the interest they collect.
Net interest income growth is the sharpest it has been in 10 years, triggered by higher interest rates and loan growth, said Goldberg. Net interest income climbed by 14% in the second quarter, on average, for the four largest banks, he estimates. He added:
“You have really strong loan growth and very low loan losses.”
But an acute recession could lead to actual loan losses and offset such gains, said Cassidy.
WALL STREET WIPEOUT
Morgan Stanley, the sixth-largest U.S. bank by assets and a significant Wall Street player and investment manager, also posts on Thursday and is predicted to show a 17% drop in profits. The fifth-largest bank, Goldman Sachs Group Inc. (GS.N), is predicted to post a 51% profit decline when it posts on July 18.
Goldman, similar to Morgan Stanley, does less consumer and business lending compared to the four largest banks, and shifts in its loan loss provisions are less significant for profits. But Goldman makes a lot of fees on deals, including stock and bond underwriting, which are estimated to drop sharply, partially negated by increased trading revenue due to elevated volatility.
Mortgage business revenue is estimated to drop as higher interest rates reduce home loan demand and refinancing. Bank’s asset management businesses will also post reduced revenue on lower stock and bond prices, Goldberg said.