U.S. banks are poised for another lackluster earnings season as market turmoil drains dealmaking activity, but industry-wide earnings contraction this year is due to investment bank earnings It is not just the decrease in
The country’s six largest banks are estimated to have allocated about $4.6 billion last quarter to cover potentially unfavorable loans.
“We expect loan loss reserves to increase by another quarter,” Jordan Jackson, global market strategist at JPMorgan, told Yahoo Finance Live on Wednesday. “This is the sixth consecutive quarter that banks have decided to increase loan loss reserves, which will drag down overall bank earnings,” he said.
This contrasts with last year when bank balance sheets benefited from the release of coronavirus-era loss reserves. This is the reserves that financial institutions built up at the start of the pandemic to absorb the potential shock of borrowers being unable to repay their debts.
As the economy recovered faster than expected, the Wall Street giants began to release their reserves, providing a big cushion to earnings.
For example, in the third quarter of 2021, JPMorgan Chase (JPM) increased its quarterly revenue by more than $2 billion. This is because we have continued to release previously held reserves for possible defaults on pandemic loans. His $11.69 billion profit in the bank at the time would have been $9.59 billion without his $2.1 billion in reserves.
With a recession on the horizon, inflation still high, and expectations of a decline in savings accounts that had been underpinned by fiscal stimulus, banks are taking steps to protect themselves in the event some customers are unable to repay their loans. Preparing defenses.
“Banks are taking a somewhat conservative approach,” Jackson explained. “Almost all analysts and market participants are calling for a 2023 recession, so banks want to strengthen their balance sheets before that.
Among these market participants is Jamie Dimon, CEO of JP Morgan, the leader of the largest US bank by assets.
Over the past few months, Dimon has also highlighted headwinds such as the ongoing Russia-Ukraine war, inflation, declining consumer confidence and “unprecedented quantitative tightening.”
“I think these are very serious things that are likely to boost the US and the world. It could send us into some kind of recession,” Dimon said Monday in an interview with CNBC.
JP Morgan secured $428 million in loan loss reserves in the second quarter and $902 million in the first quarter, according to earnings reports.
JP Morgan (JPM), Citi (C), Wells Fargo (WFC) and Morgan Stanley (MS) are due to report third-quarter results on Friday, while Goldman Sachs (GS) and Bank of America US (BAC) results will also be announced. next week.
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Alexandra Semenova is a reporter at Yahoo Finance. follow her on her twitter @alexandraandnyc
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