U.S. banks seen building $5 billion in reserves as recession risks grow

By Niket Nishant and Mehnaz Yasmin

(Reuters) – The six biggest U.S. banks are expected to 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 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 U.S. Federal Reserve hikes interest rates aggressively to tamp down inflation, the reserve build out in the third quarter could be the biggest drag on bank profits, analysts said.

JPMorgan Chase & Co (NYSE:) Chief Executive Officer Jamie Dimon on Monday warned of a recession in the next six to nine months.

The biggest U.S. bank by assets kicks off third-quarter results on Friday, followed by Wells Fargo (NYSE:), Citigroup (NYSE:) and Morgan Stanley (NYSE:). Bank of America (NYSE:) and Goldman Sachs Group Inc (NYSE:) wrap up big bank results next week.

Third-quarter profits for the banks are expected to fall between 13% and 46%, according to Refinitiv IBES estimates, which shows Citigroup is expected to build the biggest reserves in the quarter, totaling $1.51 billion.

Factors that would lead to a jump in loan loss provisions include fading fiscal stimulus measures, increased geopolitical tensions and elevated inflation, Barclays (LON:) analysts wrote in a note.

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

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

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

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