5 months ago • 2 mins
The biggest US banks are set to kick off the second-quarter earnings season, with Citigroup, JPMorgan, and Wells Fargo all slated to report tomorrow. The results run is expected to show that so far, banks have benefited (to a certain extent) from higher interest rates, plumping up their lending and investment income. Thing is, those higher rates are making it more expensive for borrowers to pay back their loans. And after three years of relatively low defaults, largely spurred on by pandemic-era stimulus funds and other forms of government aid, lenders are now starting to reel from those adverse effects of higher interest rates and inflation.
The six biggest banks in the US – JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley – are forecasted to have collectively written off $5 billion connected to defaulted loans in the second quarter of this year, according to average analyst estimates compiled by Bloomberg. That would mark the biggest jump in loan losses since the beginning of the pandemic. And what’s more, the six banks are predicted to set aside an additional $7.6 billion to cover loans that could go bad in the future. Both figures, then, are nearly double what they were at the same time last year, with credit cards and commercial real estate loans the biggest sources of pain for the banks.
Investors are certainly feeling down about the sector. According to a recent investor survey by Bloomberg, over half of the 346 participants said they expect lenders’ earnings to disappoint, with this reporting season confirming a deterioration in the sector’s outlook, hurting bank stocks in turn. That pessimism’s also reflected in the bank stocks’ expected payouts to shareholders, with the six biggest banks in the US predicted to distribute 8% less in dividends and share buybacks in 2023 than they did the previous year (see the chart above).
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