Investors on the New York Stock Exchange are sensitive to quarterly reports from US banks.
(Photo: Reuters)
Failure is a relative thing. The US financial giant JP Morgan earned eleven billion dollars in the fourth quarter of 2022 – six percent more than a year ago. Nevertheless, after the results were published, the share fell by more than three percent. The price later recovered significantly, but the interim losses show how sensitive investors are to signs of weakness at the moment. And there’s quite a bit of that on JP Morgan’s balance sheets, just like the rest of the US banks.
These weaknesses will also make themselves felt in European banks – because the fundamental problems are the same: uncertain economic prospects and persistent inflation.
The most important positive factor for the US banks in the past year was the vehement turnaround in interest rates by the Fed, which raised key interest rates sharply in the fight against inflation and thus made lending more lucrative. But the rate hikes also have a downside: they increase the risk of the US economy slipping into recession. This also increases the risk that customers will not be able to repay their debts.
That’s why JP Morgan set aside billions for impending loan defaults in the fourth quarter. In addition, the forecast for future interest income is significantly worse than analysts had hoped. At Citigroup, the increased risk provisions have already caused quarterly profits to collapse. In the three months ended December, net income fell more than 20 percent year over year, in part because loan defaults rose 36 percent in the fourth quarter.
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However, the uncertain economic prospects are not the only problem facing the industry. Even though inflation has now peaked, inflation rates will remain at a significantly higher level for the foreseeable future. This also weighs on the banks. At Wells Fargo, profits fell by 50 percent in the fourth quarter, also because the money house missed its cost targets.
>> Read here: ECB-Banking supervisor calls on institutes to protect themselves against risks more strongly
Despite the Russian war of aggression against Ukraine with all its economic consequences, 2022 was a good year for banks. 2023 will be more difficult. The positive boost from the turnaround in interest rates will subside, economic risks will increase and inflation will remain a permanent problem. For Europe’s banks maybe even a bit more than for the US competition.
More: Reluctance to pay out profits required