Banks are preparing for economic recession
2023.01.13 14:40
Banks are preparing for economic recession
By Kristina Sobol
Budrigannews.com – Banks in the United States are about to enter a recession, but they’re wearing comfy shoes. On Friday, Wells Fargo (WFC.N), Bank of America (BAC.N), Citigroup (C.N), and JPMorgan (JPM.N) all expressed concern regarding the state of the economy. However, the lenders are fairly confident that both they and their borrowers will be able to withstand a larger economic downturn.
In order to cover the possibility that customers will not repay them, major banks have increased the fees they charge. In the final three months of 2022, the four largest lenders put aside $6.2 billion, a third more than in the previous quarter. The remaining debt was for debt that might go bad, accounting for just over half.
However, the recession that they all anticipate sounds pretty light-hearted. Take for instance credit cards, one of the most lucrative and riskiest forms of debt. Jane Fraser, CEO of Citigroup, observes a rise in defaults, but only to a “normal” level. On an annualized basis, Bank of America is paying off 1.7% of its card loans, compared to an average of 2.7% since 2013. According to JPMorgan, the percentage of customers who default on their payments has decreased by 80% since the pandemic began.
All of this is good because the banks are still relying heavily on their credit cards, as any American household with a mailbox full of brochures can attest. In 2022, Citi and Bank of America each added more than 4 million new accounts. Year-over-year, Wells Fargo’s card loans increased by 21%. According to the New York Federal Reserve, the average credit card limit in the United States is increasing at the fastest rate since 2008.
Fortunately, lenders are prepared for a recession. More than three times the current level, Citi has set aside enough money to cover 7.6% of the credit card loans it loses. The situation is similar at the other banks. After the crash in 2008, they have been well padded by hawkish regulation and a decade of forced discipline. For instance, Bank of America has roughly the same number of loans as it did in 2009, but it has over 50% more tangible equity, which serves as a buffer in the event that borrowers go rogue.
Not that lenders can overlook default risk. However, for the time being, the greatest risk is that customers will become more exacting about the amounts they anticipate earning on deposits. The incentive to shop around increases with rising rates. In their Friday reports, all of the major lenders warned that this will reduce their interest income, which accounts for the majority of their revenue. Loyalty deterioration is the most pressing issue right now, not creditworthiness.
On January 13, major U.S. banks began reporting their earnings for the fourth quarter, increasing the amounts they set aside to pay off future bad debts in anticipation of the economy getting worse.
According to JPMorgan, the fourth quarter of 2021 saw an increase of 7% in earnings per share to $3.57. Earnings per share for Bank of America were $0.85, an increase of 4% annually.
Wells Fargo’s earnings per share fell 51% to $0.67 as a result of a $3.3 billion charge to cover regulatory penalties for past bad behavior, while Citigroup’s earnings per share fell 21% to $1.16.
In comparison to approximately $1.5 billion in the preceding quarter, JPMorgan took a $2.3 billion provision to cover bad loans. It stated that it might have to write off 2.6% of credit card loans in 2023, compared to 1.5% in 2022.
For the quarter, Bank of America raised its credit charges to $1.1 billion, up from $898 million for the three months ended September 30. On an annualized basis, it stated that 1.7% of credit card loans had been written off, compared to an average rate of 2.7% since 2013.
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