US bank profits will fall on rising bad debt reserves

  • Major lenders will begin reporting second quarter results on Thursday
  • The four biggest banks could record $3.5 billion in provisions for reserve analysts
  • Investors looking for clues on recession prospects

NEW YORK, July 11 (Reuters) – Second-quarter profits at major U.S. banks are set to fall sharply from a year earlier on rising loan loss reserves as the pandemic recovery gives way to a possible recession.

Analysts expect JPMorgan Chase & Co to post a 25% drop in profit on Thursday, while Citigroup Inc and Wells Fargo & Co posted a 38% and 42% drop in profit on Friday, respectively, the data showed. from Refinitiv I/B/E/S.

Bank of America Corp, which like its peers has large consumer and business lending franchises, is expected to show a 29% drop in profits when it reports on July 18.

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The fall in profits stemmed from lenders adding to their reserves for expected loan losses, a reversal from the previous year when they benefited from the reduction of such buffers as anticipated pandemic losses did not unfold. have not materialized and the economy has strengthened. Read more

“It’s going to be a fragile quarter for the sector,” said Jason Ware, chief investment officer of Albion Financial Group, which owns shares of JPMorgan and Morgan Stanley (MS.N).

Investors will want to hear executives’ thoughts on the health of the economy and whether borrowers are “more fragile now,” Ware said.

Banks must factor in the economic outlook into loan loss reserves under an accounting standard that came into effect in January 2020.

While Friday’s data showed the US economy added more jobs than expected in June, it could still be on the verge of a recession. Gross domestic product contracted in the first quarter, with consumer spending and manufacturing readings tepid over the past two weeks. Read more


Last month, JPMorgan CEO Jamie Dimon warned of an economic “hurricane”, while Morgan Stanley CEO James Gorman said there was a 50% chance of a recession. Read more

“Banks are going to have to replenish their reserves,” said Gerard Cassidy, banking analyst at RBC Capital Markets.

JPMorgan, Citi, Wells Fargo and Bank of America, the nation’s four biggest lenders, could record $3.5 billion in loss provisions versus $6.2 billion in profits last year when they released reservations, Cassidy said.

As a result, the banks’ financial results will be worse than their underlying activities. Pre-provision and pre-tax profits for the Big Four will fall just 7%, according to estimates by analysts led by Jason Goldberg at Barclays.

To be sure, banks are also adding to reserves for the additional loans they have made, as businesses have started to borrow more and consumers have once again used credit cards to travel and eat out. And loan losses and actual delinquency rates are still near record highs.

But bank executives said more lending would go wrong. Analysts will pressure banks for clues about when and how much and to what extent they could possibly offset gains in net interest income – the difference between banks’ cost of funds and the interest they receive.

Net interest income growth is the highest in a decade, fueled by loan growth and higher interest rates, Goldberg said. Net interest income rose 14% in the second quarter, on average, for the four largest banks, he estimates.

“You have very strong loan growth and very low loan losses,” he added.

But a severe recession could lead to real loan losses and reverse those gains, Cassidy said.


Morgan Stanley, the sixth-largest U.S. bank by assets and a major Wall Street player and investment manager, also reported on Thursday and was expected to post a 17% drop in profits.

The fifth-largest bank, Goldman Sachs Group Inc. (GS.N), is expected to report a 51% drop in profits when it reports on July 18.

Goldman, like Morgan Stanley, makes fewer personal and business loans than the four largest banks and changes to its loan loss provisions are less material to earnings.

But the fees Goldman makes on trades, including underwriting stocks and bonds, are expected to be down sharply, partially offset by higher trading revenue due to heightened volatility. Read more

Mortgage business revenue is expected to decline as rising interest rates dampen demand for mortgages and refinancing. Read more

Banks’ asset management businesses will also see lower revenue due to lower stock and bond prices, Goldberg said.

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Reporting by David Henry in New York. Additional reporting by Megan Davies. Editing by Michelle Price and Deepa Babington

Our standards: The Thomson Reuters Trust Principles.

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