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The largest U.S. banks will report the largest increase in loan losses this week since the start of the coronavirus pandemic as rising interest rates increase pressure on borrowers across the economy.
The release of Q2 results is expected to show that banks have benefited to some extent from higher interest rates by boosting lending and investment income. But after three years of relatively low default rates, fueled in part by pandemic-era stimulus and other government support, lenders are also starting to see the negative effects of higher rates and inflation on borrowers.
The country’s six largest banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — will average $5 billion in write-offs in the second quarter of this year, linked to defaulted loans, by average. . banking analyst estimates, as compiled by Bloomberg.
The six lenders are estimated to set aside another $7.6 billion to cover loans that could go bad, analysts estimate.
Both numbers are nearly double what they were in the same quarter a year ago. However, they remain below the blows that major banks took at the start of the pandemic, when write-offs and provisions reached $6 billion and $35 billion, respectively.
Credit cards are the biggest source of pain for a number of banks. JPMorgan’s card loan write-offs totaled $1.1 billion in the quarter, analysts estimate, up from $600 million in the year-ago period. At BofA, credit card loans account for about a quarter of debits.
Commercial real estate lending (CRE) also appears to be a drag on bank performance. Property owners are facing reduced demand for office space as remote and hybrid work arrangements remain in place even though the pandemic is over.
Wells Fargo, the largest CRE lender among the nation’s largest banks, told investors this month it added $1 billion to loan loss provisions to cover potential losses related to office buildings and other underperforming properties.
Investment banking is also likely to squeeze earnings. Earnings in the banks’ Wall Street and corporate advisory businesses are expected to fall again this quarter due to a lack of deal-making activity that has dragged on longer than many executives expected.
Trading income, which has soared in recent years in volatile financial markets, is expected to decline.
Nevertheless, banking analysts say the benefits of higher interest rates likely outweigh the drawbacks for most major banks. On average, analysts expect the six largest U.S. banks to report earnings per share up 6 percent year over year.
The largest banks “have been a good place for investors to hide amid liquidity problems for regional banks coupled with concerns about tighter regulation,” KBW banking analysts Christopher McGratty and David Konrad wrote in a note to clients. “That said, it remains a challenging environment for universal banks.”
JPMorgan, which will be among the first to report on Friday, is expected to announce the largest percentage increase in loan losses from the year-ago period.
Analysts predict that the combined cost of loan write-offs – losses marked as irrecoverable – and new provisions in the second three months of the year will be $3.8 billion. That would be 120 percent higher than the $1.8 billion in loan default charges reported at the nation’s largest bank in the same quarter a year ago.
Combined credit losses at Wells Fargo and BofA are expected to more than double in the quarter, with Goldman up 70 percent and Morgan Stanley and Citi up 60 percent.
Kenneth Leon, a banking analyst at CFRA, predicts that BofA, Citi and JPMorgan will also replenish their reserves this quarter to cover potential losses in commercial real estate.
“As lenders, banks can always do loan training with problem loans,” he wrote in a note to clients last month, “although certain individual office buildings can be challenging to remedy.”
JPMorgan, Citi and Wells Fargo will report results on Friday, followed by BofA and Morgan Stanley on July 18. Goldman reports on July 19.
The U.S. banking sector endured a crisis in its regional banking system this spring, but the Federal Reserve’s stress test results showed that the largest banks could suffer billions of dollars in losses and still have more capital than required by regulators.
Unlike many small and medium-sized banks that have paid higher savings rates to retain customers, larger institutions still offer savers relatively low interest rates, increasing their profit margins.
However, analysts expect that larger banks will eventually have to offer better rates.
“In the third and fourth quarters, the banks got a windfall in net interest income that was much higher than anyone expected. Now you’re going to give some of that back. Nobody knows exactly how many, but I don’t think it will be the majority,” said Chris Kotowski, research analyst at Oppenheimer.