US banks brace for shrinking profits and recession

US banks brace for shrinking profits and recession
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NEW YORK, Jan 10 (Reuters) – U.S. banking giants are forecast to report lower fourth-quarter profits this week as lenders stockpile funds for rainy days to prepare for an economic downturn that is disrupting investment banking.

Four American 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.

With Morgan Stanley (MS.N) and Goldman Sachs (GS.N)They are the six largest lenders expected to accumulate a combined $5.7 billion in reserves to prepare for loans, according to Refinitiv’s average estimate. That’s more than double the $2.37 billion set a year ago.

“With most US economists forecasting a recession or significant slowdown this year, banks will likely include a more severe economic outlook,” Morgan Stanley analysts led by Betsy Graske said in a note.

is the Federal Reserve Increase in interest rates Aggressive in efforts to control inflation, highest in decades. There are rising prices and higher borrowing costs The motivated consumer And business To reduce their costs, and because banks act as economic intermediaries, their profits fall when activity slows down.

All six banks are expected to report an average 17% drop in net profit in the fourth quarter from a year ago, according to preliminary analyst estimates at Refinitive.

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Still, lenders stand to profit from rising rates that allow them to earn more from the interest they charge borrowers.

Investors and analysts will focus on comments from bank bosses as an important gauge of the economic outlook. A parade of executives have warned of a tougher business environment in recent weeks, prompting firms Slash compensation or quit the job.

Goldman Sachs will Start putting off Two sources familiar with the move by thousands of employees since Wednesday said the information on Sunday. Morgan Stanley and Citigroup, among others, also cut jobs after dipping into investment-banking activities.

The moves come after Wall Street dealers face a sharp decline in their business as rising interest rates roil markets in 2022 as they handle mergers, acquisitions and initial public offerings.

Global investment banking revenue fell to $15.3 billion in the fourth quarter, down 50% from the year-ago quarter, according to data from Dellogic.

Consumer businesses will also be a key focus of the bank’s results. Household accounts have been braced for much of the pandemic by a strong job market and government stimulus, and while consumers are generally in good financial shape, they’re starting to fall behind on paying more.

“We are coming off a period of extraordinarily strong credit quality,” said David Funger, senior vice president of the financial institutions group at Moody’s Investor Services.

At Wells Fargo, fallout from a fake account scandal and regulatory fines will continue to weigh on it. The lender had expected to book about $3.5 billion in expenses after that agree to settle Allegations of widespread mismanagement of car loans, mortgages and bank accounts at the US Consumer Financial Protection Bureau, the watchdog’s largest civil penalty ever.

Analysts will also look to see if banks such as Morgan Stanley and Bank of America book any underwriting names on a $13-billion loan to fund Elon Musk. Buy Twitter.

More broadly, the KBW index (.BKX) The bank stock is up about 4% this month after sinking about 28% over the past year.

Although market sentiment turned sharply from optimism to fear in 2022, some big banks may exceed the most dire predictions as they cut back on riskier activities, wrote Susan Roth Katzke, an analyst at Credit Suisse.

“We see more resilient earnings power through the cycle after a decade of de-risking,” he wrote in a note. “We can’t dismiss basic energy.”

Reporting by Saeed Azhar, Niket Nishant and Lanan Nguyen Editing by Nick Ziminski

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