Big US Banks Prepare For Recession

Major US banks have reported mixed results for the fourth quarter, as bank executives pointed to the rising odds of a “mild recession,” with inflation and interest rate hikes challenging households and businesses. It seems like big US banks are preparing for a mild recession.

Big US Banks Prepare For Mild Recession

Major US banks released mixed fourth-quarter results on Friday as executives warned of the likelihood of a “mild recession,” and noted the difficulties faced by consumers and businesses due to inflation and interest rate increases, reports The Wall Street Journal.

JPMorgan Chase, the largest US bank, allocated $1.4 billion in extra reserves in anticipation of loan defaults, stating that its “central” scenario is “a mild recession” with slightly greater unemployment.

Bank of America set aside $403 million for probable problematic loans, citing a “increasingly slowing economic environment,” while Citigroup set aside $640 million and Wells Fargo $397 million for similar causes.

The expectation, according to Citigroup Chief Financial Officer Mark Mason, is “a rolling country-level recession rather than a simultaneous global downturn.”

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Mason said that credit card delinquencies are still coming in at extraordinarily low levels, a mark of consumer resilience, and underlined the moderate winter that Europe has experienced so far as a moderating element in the forecast.

“Our base case is still a mild recession in the latter part of 2023,” he said during a press conference, labeling the outlook “very manageable”.

Shares of banks initially fell upon the release of the reports, however, they made a turnaround during the day. All four banks ended the day with significant gains. Analyst Patrick O’Hare from Briefing.com reminded that last year, JPMorgan’s CEO Jamie Dimon had raised concerns about the possibility of an economic “hurricane”.

“The banks are bracing for at least a mild recession, but it’s not a hard landing,” O’Hare told AFP.

‘We remain vigilant’

The fourth quarter’s increase in reserves is a change from the previous year, when several banks removed reserves, which resulted in higher profits. JPMorgan’s profits reached $11.0 billion, an increase of six percent compared to the previous year, and revenues increased by 18 percent to $34.5 billion. The largest contributor to earnings was the significant rise of 48 percent in net interest income, balancing out the negative impact of weaker investment banking results and increased expenses.

Dimon praised the company’s performance, saying the “US economy currently remains strong with consumers still spending excess cash and businesses healthy.”

However, he cited the Ukraine conflict, ongoing inflation, and stricter Fed policy as obstacles, emphasizing that “we remain vigilant and are prepared for whatever happens,” according to a JPMorgan press release.

Although loan loss charge-offs were unusually low in 2022, JPMorgan forecasts a rebound to record levels by mid-2023.

Dimon, who has been warning about huge macroeconomic impediments that may contribute to a mild or severe recession for months, said his views have not altered.

“We don’t know the future,” Dimon told reporters. “I’m simply pointing out that there are geopolitical uncertainties, which are real and we just have our eyes focused on it.”

“We hope they go away. They may not,” he added at a briefing.

Bank of America’s profits for the quarter were $6.9 billion, a slight increase of 2% from the previous year, revenues increased by 11% to $24.5 billion. The results also showed a 33% increase in charge-offs to $689 million in comparison to the preceding quarter.

Alastair Borthwick, Chief Financial Officer, rated overall asset quality as “strong with loss rates increasing modestly off recent historic lows.”

Citigroup’s fourth-quarter profits dropped 21% to $2.5 billion, while revenues increased 6.0 percent to $18 billion.

Wells Fargo reported a 50% reduction in fourth-quarter earnings to $2.9 billion, mostly due to a $3.3 billion hit from regulatory issues.

In December, the bank agreed to pay $2 billion in customer compensation and $1.7 billion in civil fines as part of a Consumer Financial Protection Bureau deal.

Wells Fargo reported revenue of $19.7 billion, a 5.7 percent decrease from the previous year.

JPMorgan Chase finished 2.5 percent higher at $143.01 a share, while Citigroup gained 1.7 percent to $49.92 per share.

Denise George, former Attorney General of the US Virgin Islands, filed a lawsuit against JPMorgan Chase alleging that the company profited from Jeffrey Epstein’s sex trafficking operation before being fired from her position. The Virgin Islands AG was fired for suing JPMorgan for profiting from the Jeffrey Epstein sex trafficking operation.

Bank of America rose 2.2 percent to $35.23, while Wells Fargo increased 3.3 percent to $44.22.

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