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US financial institutions brace for falling profits and a slowing economy

This week, US banking titans are expected to post reduced profits for the fourth quarter as lenders hoard emergency funds in preparation for an economic downturn that is harming investment banking.

US Economy

On Friday, JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N), Citigroup Inc (C.N), and Wells Fargo & Co (WFC.N) will release their quarterly profits.

The six top lenders, including Morgan Stanley (MS.N) and Goldman Sachs (GS.N), are anticipated to collect a combined $5.7 billion in reserves to prepare for defaulted loans, according to Refinitiv’s average predictions. This is more than twice the $2.37 billion allocated a year ago.

The Federal Reserve is swiftly boosting interest rates in an effort to curb inflation, which is nearing its highest level in decades. 

Rising prices and rising borrowing costs have caused consumers and businesses to reduce spending, and because banks function as economic intermediaries, their earnings fall when economic activity slows.

Preliminary projections from Refintiv indicate that the average net income of the six banks will decline by 17% in the fourth quarter compared to the same period last year.

Nonetheless, lenders stand to benefit from increased interest rates, as they will be able to collect more from the interest they charge borrowers.

As a key indicator of the economic outlook, investors and analysts will closely monitor the comments of bank CEOs.

In recent weeks, a procession of executives has warned of the deteriorating business climate, which has pushed companies to lower salaries and remove positions.

On Wednesday, Goldman Sachs will begin cutting off tens of thousands of workers, according to two sources with knowledge of the situation. Following a decline in investment-banking activity, Morgan Stanley and Citigroup, among others, have slashed employment.

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Rising Interest Rates

US-Finance-Money-Bank-Investment-Federal Reserve
This week, U.S. banking titans are expected to post reduced profits for the fourth quarter as lenders hoard emergency funds in preparation for an economic downturn that is harming investment banking.

The reforms come after Wall Street dealmakers specializing in mergers, acquisitions, and initial public offerings had a dramatic decline in business in 2022 due to increasing interest rates that roiled the markets.

According to data from Dealogic, global investment banking income plummeted to $15.3 billion in the fourth quarter, a decrease of more than 50 percent from the same period a year prior.

The performance of banks will also place an emphasis on consumer-facing companies. A robust labor market and government stimulus have propped up household accounts throughout the majority of the recession, and while consumers are generally in decent financial condition, many are falling behind on payments.

David Fanger, senior vice president of Moody’s Investors Service’s financial institution’s group, stated, We are exiting a time of very good credit quality.

Wells Fargo’s earnings will continue to be impacted by the aftermath of a scandal involving bogus accounts and regulatory fines. After agreeing to settle charges of widespread mismanagement of auto loans, mortgages, and bank accounts with the US Consumer Financial Protection Bureau, the lender anticipated incurring an expense of approximately $3.5 billion. This was the biggest civil penalty ever levied by the regulator.

Analysts will also observe whether banks such as Morgan Stanley and Bank of America record writedowns on the $13 billion loan used to finance Elon Musk’s acquisition of Twitter.

The KBW index of bank equities is up almost 4% this month after falling nearly 28% in the previous year.

Analyst Susan Roth Katzke of Credit Suisse noted that while market sentiment shifted sharply from optimistic to apprehensive in 2022, some large banks may be able to defy the most dismal forecasts due to their reduction of hazardous activity.

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