Big banks set aside billions as they brace for a downturn

AMERICA’S biggest banks issued warnings Friday (Jan 13) of economic malaise on the horizon, even as some reported better-than-expected profits.

JPMorgan Chase, the nation’s largest bank, raised the risk of a “mild recession” to arrive later this year, according to Jamie Dimon, the bank’s chief executive. Brian Moynihan, Bank of America’s chief executive, also mentioned a “mild recession” as a prospect the bank is planning for. Wells Fargo is preparing for the US economy to “get worse than it’s been over the last few quarters,” said Mike Santomassimo, the bank’s chief financial officer.

JPMorgan set aside more than US$1 billion to prepare for the possibility that more borrowers fall behind on their loans. Bank of America, Citigroup and Wells Fargo also each added hundreds of millions of dollars to their cushions against loan losses.

Investors initially recoiled, pushing the banks’ shares down in early trading, before a rally sent them higher in the afternoon. All four banks ended the day in positive territory.

This comes after Moynihan of Bank of America described 2022 as “one of the best years ever for the bank,” with US$7.1 billion in net income for the fourth quarter, up slightly from the previous year and ahead of analysts’ forecasts. JPMorgan also beat expectations, earning a profit of US$11 billion last quarter, up 6 per cent from a year earlier.

Citigroup’s quarterly profit of US$2.5 billion was a fifth smaller than last year, in line with what analysts were predicting.

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Wells Fargo’s earnings were dragged down by legal costs and regulatory fines related to its consumer banking violations. The bank reported a fourth-quarter profit of US$2.9 billion, down from US$5.8 billion a year ago.

The bank chiefs generally described consumers as healthy and resilient, with account balances still fattened by pandemic savings. Higher interest rates bolstered profits in consumer units by allowing them to charge more on loans, and defaults on credit cards and other loans remain very low by historical standards.

But there has been a visible slowdown, said Moynihan of Bank of America, as consumer spending – which surged during the earlier stages of the pandemic and has held up despite stubbornly high inflation – edges back toward something more consistent with “the low inflation, 2 per cent growth economy we saw pre-pandemic.” The bank anticipates a drop in demand for auto loans, home equity lines and other consumer credit. NYT