Caution’s the word for Wall Street this earnings season.
As major US banks get ready to post their third quarter results starting tomorrow (Oct. 14), their good run won’t dictate their future dealings as much as their view of whether the economy is heading towards a recession.
JPMorgan Chase chief Jamie Dimon already kicked off this week outlining a series of concerns, including S&P 500 sliding another 20%, an economic recession hitting in six to nine months, and a lack of liquidity in many markets.
Preparing for problem loans
A major clue about banks’ outlook is in their preparedness for loan defaults: The six biggest banks by assets—JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Morgan Stanley, and Goldman Sachs—will collectively set aside about $4.5 billion in loan-loss reserves in their third-quarter earnings, the Financial Times reported, citing data from Bloomberg analysts. “It would be the third consecutive quarter of loan-loss provision increases by the banks,” FT wrote.
The rising cushioning portends that households and businesses may be in more precarious positions in the days to come. While the Federal Reserve’s rising interest rates give financial institutions a chance to make bank through to higher net income interest, the higher cost of borrowing could also mean consumers and businesses struggle to repay loans, increasing the risk of defaults.
And it doesn’t look like rising inflation will let up anytime soon. The consumer price index (CPI) climbed up 0.4% in September, government data released today (Oct. 13) show, suggesting the Fed will keep tightening its monetary policy—it’ll keep raising interest rates.
Bank business by the digits
⬆️ $58.4 billion: net interest income six biggest lenders are expected to pull in Q3 this year, up from $47.1 billion in the same period last year
⬆️ 4%: Year-on-year rise expected in third-quarter revenues at JPMorgan, BofA, Citi and Wells Fargo
⬇️ $6.73 billion: Investment banking revenue for banks this quarter, down from $13.8 billion a year ago, as uncertainty around inflation, rate hikes and the potential for a recession result in a slump in deals. Mergers and acquisition volume in the US has fallen as much as 63% in Q3, as per Dealogic
- ⬇️ 32.6%: How much Goldman Sachs’s investment banking revenue will slide year-on-year, according to estimates by Zacks Equity Research
- ⬇️ 10%: Revenue decline predictions from Wall Street for investment management and financial services firm Morgan Stanley
⬇️ 1,000+: Staff JPMorgan cut from home-lending, reassigning half and laying off half, months after Wells Fargo. Slowing demand for mortgages and refinancing are hurting revenues
⬇️ 29.7%: Drop in the S&P 500 Banks Industry Group Index for the year to date, worse than the broader markets 25%
“From here, let’s all wish him [Fed chair Jerome Powell] success and keep our fingers crossed that they managed to slow down the economy enough so that whatever it is, is mild—and it is possible…It can go from very mild to quite hard and a lot will be reliant on what happens with this war (Russia’s war in Ukraine). So, I think to guess is hard, be prepared.” —JPMorgan Chase CEO Jamie Dimon
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