US banks build reserves on inflation risk, Russia; trading a bright spot

WASHINGTON, USA – Some big US banks have again started stockpiling cash to cushion potential loan losses due to growing worries over the war in Ukraine and the impact of inflation on the US economy, although trading continues to be bright spot for Wall Street.

JPMorgan Chase & Co., Goldman Sachs Group, and Citigroup combined put aside $3.36 billion in credit loss reserves in the first quarter, the banks said.

That’s a reversal from the past 12 months when lenders released reserves after COVID-19-related losses failed to materialize, signaling lenders believe the economic rebound from that crisis may be short-lived as inflation soars and the Ukraine conflict roils markets and dampens global growth.

“The prospect for higher rates and slowing economic growth likely mean increased credit losses,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York.

“The banks do not see much in the way of current economic problems, just the likelihood that weaker economic conditions are likely to develop.”

Citigroup, the most global US bank, bore the brunt, adding $1.9 billion to its reserves related to its Russia exposure and the war’s broader macroeconomic impact. The bank’s executives said it could lose $2.5 billion to $3 billion on its Russia exposure.

JPMorgan, the country’s largest lender, on Wednesday, April 13, added $902 million to its reserves, driven by “the probability of downside risks due to high inflation and the war in Ukraine,” as well as accounting for Russia-associated exposure. It has said it could lose $1 billion on its Russia exposure over time.

Goldman likewise cited “macroeconomic and geopolitical concerns” among other reasons for its $561-million provision and said it will take a $300-million first quarter hit on Russia.

Soaring inflation could dent consumer spending while aggressive Federal Reserve interest rates rises aimed at reining in prices will likely crimp loan growth, analysts said.

The war in Ukraine and Western sanctions could knock more than 1% off global growth this year and add two and a half percentage points to inflation, the Organisation for Economic Co-operation and Development has said.

Still, some banks like Morgan Stanley and Wells Fargo & Co. have little direct Russia exposure. Wells Fargo, a domestic focused bank with a small capital markets business, actually released $1.1 billion of pandemic reserves.

Wells chief executive Charles Scharf nevertheless warned on the economic outlook in a change of tone from previous quarters, noting rate hikes will “certainly” reduce growth. “The war in Ukraine adds additional risk to the downside,” he added.

Wells Fargo’s shares were down 6% and Citi’s were up nearly 2%.

Trading, M&A

Banks’ trading businesses, however, performed better than analysts had anticipated as clients rejigged portfolios in response to expected rate hikes and the war.

Analysts had forecast trading revenue declines of 10% to 15% across the board compared with 2021 when central bank moves to stimulate the economy amid the pandemic saw equity indexes hit record highs and drove a trading bonanza across Wall Street.

Goldman Sachs said global markets first quarter revenues rose 4%, driven by a 21% rise in fixed income revenues. Morgan Stanley’s overall trading revenue fell just 6%. The banks’ share prices rose 1.3% and 2.7% respectively.

“Equity and fixed income again delivered exceptional results, particularly in Asia and Europe as we supported our global clients amid a turbulent backdrop,” chief executive James Gorman told analysts on a conference call.

JPMorgan also reported a better-than-expected trading performance on Tuesday, April 12, with overall markets revenues down just 3% compared to last year.

Equity underwriting fees slumped though as stock market listings dried up due to volatility. Goldman Sachs and Morgan Stanley both reported an 83% decline in equity underwriting revenues.

The picture for the M&A advisory business was mixed. Executives said pipelines remain healthy but some companies are pausing transactions until markets stabilize. Some deals initiated before the war were completed in the first quarter.

Morgan Stanley said advisory revenues nearly doubled from a year ago driven by completed M&A transactions. Goldman Sachs said revenues at its advisory businesses were “essentially unchanged.” – Rappler.com