PREVIEW US banks’ Q3 profits will shrink due to economic risks, decline in transactions | Techy Kings


NEW YORK, Oct 7 (Reuters) – The biggest U.S. banks are expected to report weaker third-quarter profits as the economy slows and volatile markets put the brakes on deal-making.

Four of the country’s biggest lenders – JPMorgan Chase & Co (JPM.N), Wells Fargo & Co (WFC.N), Citigroup Inc (CN) and Morgan Stanley (MS.N) – will report third-quarter earnings on Friday week in front.

The results are expected to show a decline in net income after turbulent markets curbed investment banking activity and borrowers set aside more rainy day funds to cover losses from borrowers who fell behind on their payments.

Banks usually earn more when interest rates rise because they can charge customers more to borrow. But their fortunes are also tied to the health of the broader economy.

The Federal Reserve has raised the benchmark rate from near zero in March to the current range of 3.00% to 3.25% and signals more hikes. While rising rates tend to boost bank profits, the risk of a wider economic downturn triggered by high inflation, supply chain bottlenecks and the war in Ukraine could hurt future earnings. Higher rates are expected to boost net interest income at the two biggest US banks, JPMorgan and Bank of America Corp ( BAC.N ), but a surge in borrowing costs has also hit their mortgage and auto loan businesses by cooling demand.

“The concern is that rates will rise too much and slow the economy or push it into recession,” Matt O’Connor, an analyst at Deutsche Bank, wrote in a research note.

Analysts expected profits at JPMorgan to fall 24%, while net income at Citigroup and Wells Fargo was forecast to decline 32% and 17%, respectively, according to Refinitiv I/B/E/S data.

Investment banking powerhouse Goldman Sachs Group Inc ( GS.N ) is expected to report a 46% drop in profit when it reports on Oct. 18, while earnings at rival Morgan Stanley are seen falling 28%. The decline comes as the company’s interest in mergers, acquisitions and initial public offerings dries up.

Analysts expected Bank of America’s third-quarter profit to fall nearly 14%, with strong growth in its consumer division expected to partially offset a decline in advisory fees.

The S&P 500 bank index (.SPXBK) is down nearly 30% this year. Shares of Goldman Sachs and Morgan Stanley, which are not part of the index, fell 21.4% and 19.5% respectively during the same period.

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JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third quarter.

For some investment banking businesses, the weakness was exacerbated by a decline in large private equity purchases. Transactions in the market fell 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.

US banks are drawing down $1 billion on leveraged loans and tightening as rising interest rates make it harder for them to offload high-risk debt to investors and other lenders.

“We expect further losses on this transaction,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on big banks. “It will vary a little bit,” depending on the price of the transaction initially and how much exposure remains, he said.

Wall Street banks took a combined loss of $700 million on the sale of $8.55 billion in loans and bonds that backed a leveraged buyout of business software company Citrix Systems Inc, Reuters reported last month, citing a person familiar with the matter.

Analysts also say banks will set aside more reserves in anticipation of more sour loans.

“We expect a modest, but increasing, negative impact on bank asset quality and loan growth stemming from higher rates, inflation and a moderate recession in the US, negating some of the benefits of higher rates,” wrote analysts at Fitch Ratings in a report.

The rating agency expects overall bank lending to grow 10% to 11% this year, but that could fade as interest rates rise and the economy slows.

“Banks will face a very different year in 2023 than they did in 2022,” said Christopher Wolfe, who oversees Fitch’s ratings and analysis of US and Canadian banks.

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Reporting by Saeed Azhar in New York and Niket Nishant in Bengaluru Editing by Lananh Nguyen, Nick Zieminski and Matthew Lewis

Our Standards: Thomson Reuters Trust Principles.


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