US banks likely to allocate $5 billion in third-quarter reserves as recession risks grow

US banks likely to allocate  billion in third-quarter reserves as recession risks grow


Written by Nikit Nishant and Mahnaz Yasmin

(Reuters) – The six largest U.S. banks are expected to set aside nearly $5 billion in the third quarter to cover future loan losses as lenders brace for a possible global recession, Wall Street analysts said.

Earnings at major banks got a boost last year as they released funds earmarked for potential COVID losses. In the third quarter of last year, they released about $4 billion in loan provisions, according to Refinitiv data.

But with growing fears of a recession with the US Federal Reserve aggressively raising interest rates to curb inflation, reserves in the third quarter, expected to be at their highest since mid-2020, may be the biggest drag on banks’ earnings, analysts said. .

JPMorgan Chase & Co. (NYSE) CEO Jamie Dimon warned Monday of a recession in the next six to nine months.

The largest US bank by assets begins third-quarter results on Friday, followed by Wells Fargo (NYSE :), City Group (NYSE 🙂 and Morgan Stanley (NYSE:). Bank of America (NYSE:) and Goldman Sachs Group Inc (NYSE:) results for major banks conclude next week.

Bank earnings in the third quarter are expected to fall between 13% and 46%, according to Refinitiv estimates, which show Citigroup is expected to build the largest reserves this quarter, totaling $1.51 billion.

The fading of fiscal stimulus measures, the increase in geopolitical tensions and the rise in inflation are some of the factors that could have led to a jump in provisions, Barclays (LON 🙂 Analysts wrote in a note.

However, the increase in reserves does not indicate that all is bleak and doom for the financial industry so far, according to some.

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“It’s the best of times in terms of actual loan quality,” said Mike Mayo, an analyst at Wells Fargo, adding that the banking industry is much more resilient with much lower risk than it was before previous recessions.

Banks are expected to book higher interest income from massive Fed rate increases.

However, investors remain concerned that the Fed’s tightening will eventually lead to a recession.

Shares of the six largest US banks are down between 14% and 34% so far this year.

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