New York, July 11 (BNA): Second-quarter earnings at major US banks are expected to fall sharply from a year earlier due to increased loan-loss reserves, as the pandemic gives way to the possibility of a recession.
Analysts expect JPMorgan Chase & Co to report a 25% drop in profit on Thursday, while Citigroup Inc and Wells Fargo & Co will show a 38% and 42% profit drop, respectively on Friday, according to Refinitiv I/B/E data. S, Reuters reported.
Bank of America Corp., like its peers, which has a large lending concession to consumers and businesses, is expected to show a 29% drop in profits when it reports on July 18.
The decline in profits stems from lenders adding up their reserves for expected loan losses, a reversal from the previous year when they benefited from reducing those cushions as expected pandemic losses failed to show and the economy boosted.
“It’s going to be a shaky quarter for the sector,” said Jason Weir, chief investment officer at Albion Financial Group, which owns shares of JPMorgan and Morgan Stanley (MS.N).
Ware said investors will want to hear CEOs’ views on the health of the economy and whether borrowers are “more shaken now.”
Banks must factor in the economic outlook in loan loss reserves under an accounting standard that took effect in January 2020.
While data on Friday showed that the US economy added more jobs than expected in June, it is still on the verge of recession. Gross domestic product contracted in the first quarter, with tepid consumer spending and manufacturing readings in the past two weeks.
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.
“Banks will have to build up their reserves,” said Gerard Cassidy, banking analyst at RBC Capital Markets.
Cassidy estimated that JPMorgan, Citi, Wells Fargo and Bank of America, the country’s four largest lenders, could post a $3.5 billion loss provision compared with $6.2 billion in interest last year when the reserves were released.
As a result, banks’ earnings will look worse than their core business. Pre-tax earnings for the Big Four will fall just 7%, according to estimates by analysts led by Jason Goldberg at Barclays.
Sure, banks were also adding to the reserves for the extra loans they were making, as companies started borrowing more, and consumers were using credit cards to travel and eat again. Actual loan losses and delinquency rates remain near record lows.
But bank executives said more loans would default. Analysts will press banks for clues about timing, size and how much they can ultimately compensate for gains in net interest income — the difference between the cost of money to banks and the interest they receive.
Goldberg said net interest income growth is the highest in a decade, buoyed by loan growth and higher interest rates. He estimates that net interest income rose 14% on average in the second quarter for the four largest banks.
“You already have strong loan growth and very low loan losses,” he added.
Cassidy said a severe recession could cause actual loan losses and cancel those gains.
As reported by Morgan Stanley, the sixth largest US bank by assets and a major player and investment manager on Wall Street, on Thursday, it is expected to show a 17% drop in earnings.
The fifth largest bank, Goldman Sachs Group Inc., is expected to register. (GS.N), down 51% in earnings when it reports July 18.
Goldman, like Morgan Stanley, offers less consumer and commercial lending than the Big Four, and changes in loan-loss provisions are less significant to earnings.
But Goldman Sachs’ fees on deals, including underwriting stocks and bonds, are expected to fall sharply, offset in part by more trading returns due to increased volatility.
Mortgage business yields are expected to decline as higher interest rates dampen demand for housing loans and refinancing.
Goldberg said asset managers at banks will also report lower revenue due to lower stock and bond prices.
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