Later this week and the following week, when the nation’s six largest financial institutions are expected to have finished crunching the numbers for third-quarter earnings reports, it is anticipated that bank loan-loss reserves will increase for the third consecutive month, to as much as $4.5 billion.
The Financial Times claims that reports from J.P. Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo, and Morgan Stanley on the state of, and forecasts for, economic activity and concerns in the United States also give hints from Wall Street.
The Financial Times said that experts anticipate banks to set aside around $4.5 billion in loan-loss reserves overall, according to figures compiled by Bloomberg.
The infusion of stimulus money significantly reduced the anticipated loan losses from COVID-19, which were initially alleviated by enhanced bank reserves. Banks are bracing for the possibility that rising interest rates will lead to credit losses, yet there is a robust demand for loans.
Analysts now forecast that the six banks’ average profits per share may decline by as much as 22% on average during the third quarter.
“The broad economic outlook has deteriorated dramatically, so it would be natural to expect some further pick-up in bank reserving activity,” says Ken Usdin, a banking analyst at Jefferies
“There isn’t a lot of confidence that losses will start to rise straight away at this point. But the bigger concern is how the economy will change over the next 12 to 18 months, Usdin said.
Banks are obligated to keep the cash reserves they have built up in accordance with the currently anticipated credit losses (CECL) standards.
“There is little question that there is less of a difference between the economic forecast at the end of June and the end of September. Gerard Cassidy of RBC Capital Markets told FT that in order to comply with CECL, the reserve buildings must rise.
