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US banks likely set aside $5 billion in Q3 reserves as recession risks grow

US banks likely set aside $5 billion in Q3 reserves as recession risks grow

JPMORGAN. A person enters the JPMorgan Chase & Co. headquarters in Manhattan, New York City, June 30, 2022.

Andrew Kelly/Reuters

With growing fears of a recession, major US banks' loan loss provisions could be the biggest drag on their profits

The six biggest US banks are expected to have set aside nearly $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-19 losses. In the third quarter of last year, they released about $4 billion of loan provisions, according to data from Refinitiv.

But with growing fears of a recession as the US Federal Reserve hikes interest rates aggressively to tamp down inflation, reserves in the third quarter, expected to be at the highest levels since mid-2020, could be the biggest drag on bank profits, analysts said.

JPMorgan Chase & Co. chief executive officer Jamie Dimon on Monday, October 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, October 14, 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% and 46%, according to Refinitiv estimates, which show Citigroup is expected to build the biggest reserves in the quarter, totaling $1.51 billion.

Fading fiscal stimulus measures, increased geopolitical tensions, and elevated inflation are some factors that could have led to a jump in provisions, Barclays analysts wrote in a note.

However, a surge 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 expected to book higher interest income from the Fed’s supersized rate increases.

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

Shares of the big six US banks have plunged between 14% and 34% so far this year. –

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