US banks seen building US$5b in reserves as recession risks grow

THE six biggest US banks are expected to set aside nearly US$5 billion in the third quarter to cover future loan losses, Wall Street analysts said, as lenders brace for a potential global recession.

Profits at big banks got a boost last year as they released funds reserved for potential Covid losses. In the third quarter of last year, they released about US$4 billion of loan provisions, according to data from Refinitiv.

But with growing fears of a recession as the US Federal Reserve (Fed) hikes interest rates aggressively to tamp down inflation, the reserve build out in the third quarter could be the biggest drag on bank profits, analysts said.

JPMorgan Chase chief executive officer Jamie Dimon on Monday (Oct 10) warned of a recession in the next six to nine months.

The biggest US bank by assets kicks off third-quarter results on Friday, followed by Wells Fargo, Citigroup and Morgan Stanley. Bank of America and Goldman Sachs Group wrap up big bank results next week.

Third-quarter profits for the banks are expected to fall between 13 per cent and 46 per cent, according to Refinitiv IBES estimates, which shows Citigroup is expected to build the biggest reserves in the quarter, totalling US$1.51 billion.

Factors that would lead to a jump in loan loss provisions include fading fiscal stimulus measures, increased geopolitical tensions and elevated inflation, Barclays analysts wrote in a note.

However, a jump in reserves does not suggest all is gloom-and-doom for the financial industry yet, according to some.

“It’s the best of times in terms of actual loan quality,” Wells Fargo analyst Mike Mayo said, adding that the banking industry is way more resilient with far less risk than it had before prior recessions.

Banks are also expected to book higher interest income from the Fed’s supersized rate increases.

Still, investors remain worried that the Fed’s tightening to cool inflation will eventually lead to a recession.

Shares of the big six US banks have plunged between 14 per cent and 34 per cent so far this year. REUTERS