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The outlook for the U.S. financial system and the largest Wall Road banks is becoming increasingly bleak, with many senior executives announcing they are preparing for a possible slowdown or recession.
Following the short but robust pandemic recession in 2020, many bank CEOs have spent the last 12 and a half months touting the electricity of the US economy and the resilience of the US buyer. Many did so again on Friday after reporting their quarterly results, but this time with a primordial warning.
“We appreciate the power dynamics being built in various areas of the economic climate that could lead to future stress,” said Andy Cecere, CEO of the US financial institution.
Such feedback reflects growing evidence that the US and global economic climate is weakening in the face of international inflation and the battle in Ukraine. On Tuesday, the International Financial Fund lowered its 2023 forecast for international financial growth from 2.9% to 2.7%.
Half a dozen banks released their quarterly results on Friday, ranging from giants JPMorgan Chase and Citigroup to tremendous regional banks like US Financial Institution and PNC Fiscal. In calls with journalists and traders, executives from financial institutions painted a bifurcated picture of the economic climate.
On the one hand, they referred to a low default rate, strong spending on purchases and leisure activities among the company's clients. At the same time, they mentioned decades-long high inflation rates, a housing market that is rapidly slowing down, and a Federal Reserve that is raising prices at an extraordinary pace, which will make it even more problematic for companies to lend.
“"Inflation is casting a long shadow over the future prospects of these banks," highlighted Peter Torrente, head of the US banking and capital markets sector at the accounting giant KPMG.
Inflation has been consistently high for months, with this week's analysis of buyer spending showing an 8.2% increase in prices in September compared to the previous 12 months. Fed officials have raised their short-term rate by three-quarters of a percentage point three times in a row, bringing it to a 3.25% high in 14 years. The road ahead is expecting another 0.75% increase in November.
Reflecting the gloomier macroeconomic outlook, Citigroup, Wells Fargo, and JPMorgan accumulated profits in their loan loss reserves. These reserves are intended to cover undoubtedly unhealthy loans. During the pandemic, the banks placed tens of billions of dollars in these reserves, but released most of these funds in 2021, reflecting developments in the economic climate.
Banks are now strengthening their reserves again. JPMorgan set aside approximately US$1 billion in its mortgage loss reserves, while Citigroup and Wells added approximately US$400 million to their reserves this quarter. The pace of additions is slower than at the start of the pandemic when, for example, JPMorgan added over US$10 billion to its reserves in a single quarter.
The goal of the Fed's spending increases is to moderate the economic climate and reduce inflation. The likelihood of going too far and causing a recession is a major concern for economists, Wall Highway analysts, and executives at financial institutions.
Wells Fargo CEO Charlie Scharf told traders at a conference that the bank expects broader economic conditions to weaken, leading to increases in defaults and losses in credit scores.
Cecere, the CEO of the US financial institution, stated: “Although the scenario is favorable these days, it will no longer be surprising for us to see a financial slowdown in some factor driven by decreased confidence levels, which may also result in reduced spending and corporate financing.”
JPMorgan Chase CEO Jamie Dimon made headlines on Monday when he spoke of a "very, very serious" mix of considerations that could lead to a recession in the next six to nine months.
On Friday, Dimon spoke about the reality that US customer readability is still incredible. Buyers are pushing for readability.
“I’m trying to reconcile his comments from before and now,” Mike Mayo, an analyst at Wells Fargo Securities, told Dimon.
In response, Dimon described the current economic environment as “atypical,” reflecting reality, with low default rates and robust customer spending despite inflationary headwinds. However, he estimated that the extra savings American households accumulated during the pandemic could be depleted by mid-2023 if inflation is not brought under control.
One element that supports Dimon's comments is the amount of spending customers are doing with their credit cards. Wells Fargo, Citigroup, and JPMorgan have suggested double-digit increases in buyer bank card spending compared to the previous year.
While JPMorgan executives pointed out that some of this spending could very well be patronage returning to pre-pandemic spending patterns, inflation could be effectively stretching household budgets.
