Phase of high credit quality ends: US banks earn billions – loan loss provisions increase

Phase of high credit quality ends
US banks earn billions – loan loss provisions increase

The reporting season begins with the figures from the first US banks. The industry heavyweights are reporting weaker takeover business. In return, the interest rate policy of the central banks stimulated other business areas. However, the first signs point to an incipient – albeit mild – economic downturn.

Despite fears of a recession, the big US banks have made billions. While on the one hand increasing risk provisions for possible loan defaults and a weakening business with mergers and acquisitions (M&A) burdened the results, on the other hand the financial institutions benefited from higher interest income. Industry leader JP Morgan increased its profit by six percent to $11 billion for the year, Bank of America by two percent to $6.9 billion. At Citigroup, however, earnings fell by a fifth to $2.5 billion. At Wells Fargo, a billion-dollar fine cut profits in half to around $2.9 billion. “Today’s results from banks were solid,” summarized banking analyst Peter Torrente of KPMG.

In anticipation of another turbulent year, the four banks set aside risk provisions for possible loan defaults totaling around four billion dollars in the fourth quarter. The biggest damper came from the weak business with mergers and acquisitions. Investment banking commissions at JP Morgan, Bank of America (BofA) and Citi each fell more than 50 percent as companies continued to hold back on investments in the face of uncertain geopolitical and economic conditions.

JP Morgan and BofA sought to allay workers’ concerns over massive job cuts at rival Goldman Sachs. “We continue to hire and are in growth mode,” said JPMorgan CFO Jeremy Barnum. Bank of America is also not planning any mass layoffs, it said.

The banks were able to benefit from growing interest income, with which they were able to partially make up for the slack in the M&A business. The US Federal Reserve raised interest rates from zero to between 4.25 percent and 4.5 percent last year to combat inflation.

“Consumers remain quite well equipped”

Investors and analysts not only focused on the quarterly results, but also on the bank bosses’ economic outlook for the new year. JPMorgan currently expects a moderate deterioration in the macroeconomic outlook and a mild recession. The US economy remains strong, consumers continue to spend and companies remain healthy, said JPMorgan boss Jamie Dimon. Thanks to the strong US job market and government subsidies in the corona pandemic, consumer savings rose, and retail banking remained largely resilient. “Consumers remain quite well-armed,” said BofA chief financial officer Alastair Brothwick.

However, there are also signs of a possible recession in this segment: the second largest US bank reported slower growth in consumer spending. In addition, US banks are now reporting the first payment defaults. “We are getting out of a phase of extraordinarily high credit quality,” says David Fanger, banking expert at the rating agency Moody’s.

The US banks’ reporting season began with the figures. Morgan Stanley and Goldman Sachs will follow next week. In Germany, Deutsche Bank will publish its results at the beginning of February.

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