American Banks Prepare for Decline in Profits, 17 Percent Drop Predicted for Top Six Banks in the Fourth Quarter

A combination file photo of Wells Fargo, Citigbank, Morgan Stanley, JPMorgan Chase, Bank of America, JPMorgan, and Goldman Sachs. (Reuters)

Big banks in the United States are getting ready to deal with shrinking profits due to factors like an overall difficult economic environment, despite the fact that interest incomes have risen over the past year.

JP Morgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley are the six largest lenders in the United States. Combined, the six banks are expected to set aside $5.7 billion in reserves to deal with soured loans, which is more than double the $2.7 billion they had toset aside a year back.

“With most U.S. economists forecasting either a recession or significant slowdown this year, banks will likely incorporate a more severe economic outlook,” Morgan Stanley analysts said in a note, according to Reuters.

Preliminary estimates from Refinitiv predict the six banks will report a 17 percent drop in net profit on average in the fourth quarter compared to the year-ago period. Rising borrowing costs and prices have forced businesses and consumers to limit their spending, which affects the profitability of banks.

JP Morgan Chase, Citigroup, Bank of America, and Wells Fargo are expected to report their earnings this Friday. Multiple bank chiefs had recently warned about a tougher business environment and have announced job cuts as well as a reduction in compensation. Investors will closely be paying attention to the commentary from the executives to ascertain the economic outlook.

High Interest Income, Flat Revenues

Analysts estimate Wells Fargo, Bank of America, Citigroup, and JP Morgan Chase to have generated interest income of around $60 billion for the fourth quarter, according to the Financial Times. This would be up by 30 percent compared to the same period in 2021.

However, analysts believe that the banks will find it harder to maintain the rapid growth in net interest income due to the Federal Reserve raising rates less quickly and customers raising pressure on banks to pay higher rates on deposits.

“It strikes me that 2023 will largely be one of inflection, mostly from tailwinds to headwinds for the industry,” Scott Siefers, banking analyst at Piper Sandler, said to the media outlet.

“I think the further along we get in this [Fed] tightening cycle and the further we move upward [in rates], the tougher it’s going to be for banks to keep down their deposit costs.”

Overall, the six big banks are expected to report fourth-quarter revenues that are largely unchanged from a year ago. However, earnings per share (EPS) is estimated to fall by roughly 25 percent on average, according to analysts.

Global Banking Situation

According to McKinsey’s Global Banking Annual Review published in December, bank profitability hit a 14-year high in 2022, with revenues growing by $345 billion. The expected return on equity was estimated in the range of 11.5–12.5 percent.

The consulting firm attributes the growth to “sharp increases in net margins” owing to a rise in interest rates. However, more than half of the world’s banks had a return on equity that was below the cost of equity last year.

“For the second half of 2022, our analysis suggests that margin increases delivered returns above the cost of equity for just 35 percent of banks globally. And less than 15 percent of banks are earning more than 4 percent of their respective cost of equity,” the report states.

McKinsey cites five “shocks” that are affecting banks globally. This includes a) soaring inflation and a potential recession; b) steep decline in asset values; c) disruptions to energy and food supply, which contributed to inflation; d) supply-chain shock; and e) talent shock, with many people leaving the workforce or working remotely.