TOUGH TIMES

America’s biggest banks’ earnings are poised to be big disappointments

America’s four big banks—JPMorgan Chase, Bank of America, Wells Fargo, Citigroup—reporting earnings on Friday (Jan. 10)

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The banks are not feeling so bullish about their prospects.
The banks are not feeling so bullish about their prospects.
Photo: Spencer Platt (Getty Images)

The finance world awaits a bumper earnings day on Friday (Jan. 13)—but only due to the number of banks reporting earnings—the results they are due to post are not looking rosy.

Analysts’ expectations concerning four of America’s biggest banks—JPMorgan Chase, Bank of America, Wells Fargo, Citigroup—that are reporting earnings on Friday point to their profits sliding as banks dealt with fears of an economic slowdown.

To tackle the impending crisis, banks have been setting aside more bad loans provisions and cutting staff while they hope for a revival in consumer spending.

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BlackRock, Bank of New York Mellon, and First Republic Bank also report earnings on Jan. 13.

Charted: US banks’ earnings forecast for Q4 2022

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Banks tighten fists as profits plummet, by the digits

17%: Average drop in net profit in the fourth quarter from a year earlier for the six big banks (the four banks reporting earnings, along with Morgan Stanley and Goldman Sachs), according to Refinitiv estimates.

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$5.7 billion: How much these six largest lenders are expected to accumulate in reserves to prepare for problem loans, according to Refinitiv projections.

Layoff’s the word at America’s big banks

Along with the growing reserves, the spate of layoff is further proof of austerity measures taking centerstage.

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Goldman Sachs is expected to lay off more than 3,000 employees–a third of which would be cut from its banking and trading unit—this week. Last month, Morgan Stanley cut 1,600 people, or 2% of its workforce, and Wells Fargo axed hundreds from its mortgage unit.

Bank of America has taken a softer approach, relying on organic turnover to shrink the workforce by only backfilling crucial positions when employees are willingly leave. Typically, a big bank sees around 8% of its staff leave in a given year.

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Are Fed’s interest rate hikes helping banks?

Banks typically tend to benefit from rising interest rates because it increases net interest margins—the difference in what they pay on deposits and what they earn from loans and other assets. Especially for brokerages, commercial banks, and regional banks. But the higher rates also could lead to more defaults, prompting banks to prepare for the worst-case scenario.

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The finance sector players “have been net beneficiaries of higher interest rates through improved margins,” Zacks Investment Research’s earnings preview notes. “But most of them have suffered some estimate cuts, though significantly smaller than what companies in the tech, consumer discretionary and construction sectors have already endured.”

Also, sustaining the interest rate-induced income won’t be easy if the Federal Reserve lifts rates less quickly—which it plans to, but not before 2024—and if competition climbs up as customers shop around for the best rates.

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Banks really can’t afford for their one bright spot to shrink as a major arm, investment banking, struggles to earn deal-making and listings revenue amid tough market conditions. Goldman Sachs and Morgan Stanley, which are more reliant on investment banking, trading and asset management, post their financial report card on Jan. 17.

One more thing: CPI data releases a day before bank earnings

On Thursday (Jan. 12), the Consumer Price Index (CPI) for December is poised to bring some relief. Analysts expect inflation to have cooled further to 6.1% from November’s already improving 7.1%. Core CPI, which excludes food and energy, is expected to be down to 5.6% from 6%.