US banks set aside $4 billion for potential losses from bad debt

Big U.S. banks set to voice concerns about U.S. economy in third-quarter earnings reports starting this week, analysts set aside more than $4 billion to cover potential losses from bad debt I expect to.

Expected reserves were made by lenders at the start of the 2020 coronavirus pandemic, which raised tens of billions of dollars in reserves to prepare for economic shocks largely avoided thanks to unprecedented monetary and fiscal much smaller than that. stimulation.

Today, loan demand is still rising, and banks are bracing for higher interest rates that could slow the economy and lead to higher credit losses.

“The overall economic outlook has deteriorated somewhat, so it would be reasonable to expect a gradual recovery in bank reserve dynamics,” said Ken Usdin, banking analyst at Jefferies. Stated.

“At the moment, it is not very likely that losses will grow any time soon. Economy It looks like next year to 18 months. “

Six big US bank By asset class, JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley reported about 45% in the third quarter, according to analyst estimates compiled by Bloomberg. Build a $100 million loan loss reserve. It was his third straight quarter of an increase in loan loss reserves by banks.

Investors will also be watching whether banks mark losses on leveraged buyout loans that have committed funding but have not yet been able to sell to third parties.In the second quarter, banks took Mark-to-market losses of hundreds of millions of dollars.

JP Morgan, Morgan Stanley, Citi and Wells Fargo report results on Oct. 14, BofA on Oct. 17 and Goldman the next day.

The KBW Banks Index is down about 22% in 2022, while the benchmark S&P 500 Index is down about 20%. The decline has helped lenders increase their net interest income (the difference between what banks pay for deposits and the income they earn from loans and other assets) as interest rates rise, but more loans are being made. reflect concerns that the

Analysts at Autonomous Research said, “Bank stock investors are a group that never likes to ‘enjoy the moment’, they’ve already read the ‘good news’ and they think ‘earnings are nearing their peak’. I am afraid that

Banking executives say U.S. credit quality remains excellent, defaults are well below historical standards, and businesses and customers are still hoarding cash accumulated during the pandemic.

“Consumers here in the US are in a very good place,” JP Morgan President Daniel Pinto said at an industry conference last month.

Analysts also said a large US bank: Stress test sponsored by the Federal Reserve and new capital requirements — well-positioned to weather the recession.

“Banks are entering this period of uncertainty in a strong position,” said Jason Goldberg, banking analyst at Barclays.

Under the current Expected Credit Loss, or ‘Cecl’, methodology introduced in 2020, banks will need to set reserves in good time to ensure they have an adequate capital buffer in the event of losses. there is.

“The difference in the economic outlook from the end of June has clearly weakened compared to the end of September. Therefore, according to Cecl, reserves need to be increased,” said Gerard Cassidy of RBC Capital Markets.

Analysts expect earnings per share across major banks to decline by about 22% on average in the sixth quarter.

JP Morgan, BofA, Citi and Wells’ third-quarter earnings are expected to grow about 4% year-over-year, benefiting from higher net interest income.

Goldman and Morgan Stanley are expected to see lower earnings as they get a larger share of their earnings from investment banks. slow trading activity.

“Traditional investment banks are very weak. Equity capital markets have fallen quite significantly,” said Christian Boll, an analyst at Autonomous Research.

This decline will force banks to focus more and more on managing expenses and people.

Against the backdrop of market volatility, banks’ equities and fixed income trading divisions are expected to continue their strong performance in the third quarter.

“Trading, generally speaking, should be slightly up from a particularly strong third quarter last year,” said Barclays’ Goldberg.

Additional reporting by Imani Moise

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