Big U.S. banks are expecting a drop in second-quarter profits, brought on by a padding of reserves for anticipated loan losses, according to Reuters.
The forecast marks a turnaround from last year, when lenders reduced reserves as the economy rebounded after the height of the pandemic.
JPMorgan Chase & Co. will report a 25% drop in profit; Citigroup Inc., 38%; Wells Fargo & Co., 42%; and Bank of America, 29%, according to Refinitiv I/B/E/S Estimates.
"It's going to be a shaky quarter for the sector," Jason Ware, Chief Investment Officer for Albion Financial Group, which owns shares of JPMorgan and Morgan Stanley, told Reuters.
Banks must factor the economic outlook into loan loss reserves under an accounting standard that took effect in January 2020, so investors will be interested in the banks’ perspective on the economy’s future health, Ware said.
"The banks are going to have to build up their reserves," said Gerard Cassidy, a bank analyst at RBC Capital Markets.
The largest four lenders, JPMorgan, Citi, Wells Fargo, and Bank of America, could record $3.5 billion of loss provisions, compared with $6.2 billion of benefits last year when they released reserves, Cassidy said.
Consequently, the banks' bottom lines will look worse than their underlying businesses. Pre-provision, pre-tax profits for the four banks will be down only 7%, according to estimates by analysts led by Jason Goldberg at Barclays.
And, as companies have begun to borrow more and consumers have used credit cards with more frequency, banks are adding to reserves for additional loans. Actual loan losses and delinquency rates are still near record lows.
Banks will have to offset gains in net interest income, which is the difference between their cost of funds and the interest they receive. Now, net interest income growth is the highest it has been in a decade, powered by loan growth and higher interest rates, said Goldberg. In the second quarter, it rose 14%, on average, for the four largest banks, he said.
"You have really strong loan growth and very low loan losses," he said.