US banks brace for shrinking profits and recession

New York, Jan. 10 (Reuters) – U.S. banking giants are forecast to report lower fourth-quarter profits this week as lenders stockpile rainy-day funds to prepare for an economic slowdown hitting investment banking.

Four US banking giants — JPMorgan Chase & Co (JPM.N)Bank of America Corp (PAC.N)Citigroup Inc (CN) and Wells Fargo & Co (WFC.N) — will report earnings on Friday.

With Morgan Stanley (MSN) and Goldman Sachs (GSN), they are the six largest lenders, according to Refinitiv’s median estimates. This is more than double the $2.37 billion allocated a year ago.

“With most U.S. economists forecasting a recession or significant recession this year, banks will attach a more dovish economic outlook,” Morgan Stanley analysts led by Betsy Grasek said in a note.

The Federal Reserve has been aggressively raising interest rates in an effort to control inflation, which is at its worst in decades. Rising prices and high borrowing costs have prompted consumers and businesses to rein in their spending, and as banks act as economic intermediaries, their profits fall when activity slows.

The six banks are expected to post an average 17% drop in net profit in the fourth quarter, according to preliminary analyst estimates at Refindiv.

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However, lenders benefit from rising rates that allow them to earn more from the interest they charge borrowers.

Investors and analysts will focus on bankers’ commentary as an important gauge of the economic outlook. A parade of executives in recent weeks has warned of a tough business climate, prompting companies to cut compensation or cut jobs.

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Goldman Sachs will begin laying off thousands of employees starting Wednesday, two sources familiar with the move said Sunday. Morgan Stanley and Citigroup, among others, have cut jobs after a slump in investment-banking activity.

The moves come after Wall Street dealmakers in mergers, acquisitions and initial public offerings faced a sharp drop in their businesses in 2022 as rising interest rates rocked markets.

Global investment banking revenue fell to $15.3 billion in the fourth quarter, down more than 50% from the year-ago quarter, according to data from Dealogic.

Consumer businesses will also be a key focus of banks’ decisions. A strong job market and government stimulus have boosted household bills for much of the pandemic, and while consumers are generally in good financial shape, more are starting to fall behind on payments.

“We are coming off a period of unusually strong credit quality,” said David Fanger, senior vice president of the financial institutions group at Moody’s Investors Service.

At Wells Fargo, the fallout from the fake accounts scandal and regulatory fines will continue to weigh on results. The lender is expected to book costs of about $3.5 billion after agreeing to settle with the US Consumer Financial Protection Bureau allegations of widespread mismanagement of car loans, mortgages and bank accounts.

Analysts will also look at whether banks such as Morgan Stanley and Bank of America wrote down any of the $13 billion in debt Elon Musk used to finance his purchase of Twitter.

In more detail, the KBW index (.BKX) Bank stocks are up about 4% this month after falling nearly 28% over the past year.

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Even if market sentiment takes a sharp turn from optimism to fear in 2022, the worst forecasts can be weathered as some big banks reveal riskier operations, Credit Suisse analyst Susan Roth Katzke wrote.

“After a decade of de-risking we see more resilient earnings power through the cycle,” he wrote in a note. “We cannot rule out fundamental strength.”

Reporting by Saeed Azhar, Niketh Nishant and Lanan Nguyen Editing by Nick Zieminski

Our Standards: Thomson Reuters Trust Principles.

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