Oct 11 (Reuters) – The six largest US banks are expected to have set aside nearly $5 billion in the third quarter to cover future loan losses, Wall Street analysts said, as lenders braced for a potential global recession.
Profits at big banks got a boost last year as they released funds earmarked for potential COVID losses. In the third quarter of last year, they issued about $4 billion in loan provisions, according to data from Refinitiv.
But with fears of a recession growing as the US Federal Reserve raises interest rates aggressively to curb inflation, reserves in the third quarter, expected to be at their highest level since mid-2020, could be the biggest drag on bank profits, analysts said. .
JPMorgan Chase & Co ( JPM.N ) Chief Executive Officer Jamie Dimon on Monday warned of a recession in the next six to nine months. read again
The largest U.S. banks by assets began reporting third-quarter results on Friday, followed by Wells Fargo ( WFC.N ), Citigroup ( CN ) and Morgan Stanley ( MS.N ). Bank of America ( BAC.N ) and Goldman Sachs Group Inc ( GS.N ) wrap up big bank decisions next week.
Third-quarter profits for banks are expected to fall between 13% and 46%, according to Refinitiv estimates, which show Citigroup is expected to build the largest reserves in the quarter, amounting to $1.51 billion. read again
Fading fiscal stimulus measures, rising geopolitical tensions and high inflation are some of the factors that could cause a surge in provisions, Barclays analysts wrote in a note.
However, the surge in reserves does not indicate all is gloom and doom for the financial industry, according to some.
“It’s the best time ever in terms of actual loan quality,” Wells Fargo analyst Mike Mayo said, adding that the banking industry is much more resilient with much lower risk than it was before the previous recession.
Banks are expected to book higher interest income from the Fed’s supersize rate hike.
Still, investors remain concerned that the Fed’s tightening will eventually lead to a recession.
Shares of the big six US banks have plunged between 14% and 34% so far this year.
Reporting by Niket Nishant, Manya Saini and Mehnaz Yasmin in Bengaluru; Editing by Shinjini Ganguli and Saumyadeb Chakrabarty
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