Big U.S. banks are reportedly bracing for a surge in bad debt disposals, the highest since the early days of the pandemic.
JPMorgan Chase, Citigroup, Wells Fargo and Bank of America are expected to report a combined $5.3 billion in net charge-offs in the third quarter, more than double the same period last year. Bloomberg reported. report Wednesday (October 11).
This comes as interest rates remain high and the possibility of a recession looms, making it increasingly difficult for borrowers to meet their financial obligations, the report said.
Deteriorating creditworthiness of borrowers is a major concern for banks, the report said. Consumers with low credit scores are especially vulnerable because their savings are being eroded by inflation.
PYMNTS reported in July that until recently, consumers had mostly paid off their credit cards and other loans. This situation began to change in July, as the country’s six largest banks reported then-highest interest rates. bad debt loss Since the pandemic began.
As banks prepare to report third-quarter earnings, another factor analysts and investors are watching closely: net interest income According to a report by Bloomberg, this is the difference between the interest earned on loans and the interest paid on deposits. Rising deposit costs and increased competition are putting pressure on NII, leading to a decline in banks’ profits.
Loan growth has also been subdued, exacerbating the situation, the report said. As evidenced by the series of bank failures earlier this year, regional financial institutions have been particularly hard hit by the effects of rising interest rates. However, JPMorgan stands out as an outlier on NII because of the profits it has made from NII. acquisition of the First Republic.
Additionally, the introduction of new capital requirements by federal regulators poses new challenges for banks, according to the report.
The investment banking sector is expected to continue to face challenges, advisory fees are likely to remain depressed and a recovery in merger activity is still a long way off, the report said. However, underwriting is expected to improve compared to last year’s depressed levels.
Trading revenue is also an important factor to note in each bank’s earnings release, with Citigroup being the only top bank expected to increase in this area, the report said. Increased activity in fixed income, currency, and commodity markets contributed to Citigroup’s profits. Nevertheless, trading revenue for the big five banks is expected to decline overall due to harsh comparisons with the previous year, when geopolitical events increased market volatility.