The biggest US banks do not see this year as positive at all. They offered us their insights.
Earnings season has begun, and some US banks have already reported their results. As part of these results, banks have also given us their view of the current year 2023 in their presentations. So how do the banks see this year, positively or negatively? Do they expect a recession or do they think we will avoid a recession? You can read all this below.
We still have high inflation raging, and the Fed is still trying to fight that inflation by raising interest rates. This battle between the Fed and inflation has been with us for most of the past year, and it still looks like it is far from won. At this point, the Fed is willing to do virtually anything to win the battle over inflation as soon as possible, even at the cost of putting the US economy into recession. Of course, this is probably not a scenario that any of us would wish for, so today we will look at how the major US banks see the situation.
JP Morgan $JPM-0.4%
According to CEO Jamieo Dimon's statement, the company is trying to prepare for all scenarios because there are too many different variables that are putting pressure on the economy. In short, Jamie Dimon said last summer that they were preparing for what he called an economic hurricane. Now, a few days ago, he came back to that term again, and it is clear that he believes that we are going to have an economic hurricane this year. This can be inferred, for example, from the fact that the bank has increased its reserves by around USD 1.4 billion in order to be able to cope with any loan defaults.
Here we have a statement from Jamie Dimon, who commented on the US economy as follows:
The US economy remains strong at the moment and consumers are still able to spend surplus money and businesses are healthy. However, we still don't know the ultimate effect of headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation has eroded purchasing power and pushed interest rates higher, and on top of that unprecedented quantitative tightening. We remain vigilant and ready for whatever happens.
As we can see, JP Morgan $JPM-0.4% is certainly not underestimating anything, and is trying to prepare for any scenario. It is certainly already anticipating that some loans will not be repaid, and judging by its reaction, I infer that the company expects a further increase in these outstanding debts this year.
So, if I were to summarise, JP Morgan sees this year as full of uncertainty, and perhaps I would even dare to say a little bit that this year will still be marked by the last one. As I said above, because of the fear of loan defaults, the bank has increased its provisioning to be able to withstand such a situation.
Bank of America $BAC+1.6%
Bank of America $BAC+1.6% is working with a mild recession this year, as a base case scenario. It has also begun to adjust accordingly, and to increase its reserves, specifically by about $403 million. USD. So, it can be seen here that the outlook for this company for this year is also not very positive, given that the company is also slowly starting to hedge against defaults of its clients, and potential losses in the investment area.
BofA CEO Brian Moynihan commented on the company's outlook as follows.
Our scenario assumes a mild recession. This is the base case for the economic assumptions in blue chip equities and other methods we use. However, we also add a downturn scenario, which results in 95% of our reserve methodology being weighted towards a recessionary environment in 2023.
As we can read from the BofA CEO's view, he expects a recession with almost 100% probability, and with it a possible decline in equity markets. The bank will, of course, use the aforementioned reserves to cover any losses. After all, the CEO himself has practically said that they are preparing for a recession this year.
Citigroup $C+2.0%
Another bank that contributed its outlook was Citigroup. Of course, there was no going off the rails here, either, and this bank is predicting a mild recession, saying that it thinks what is happening in the markets now is completely irrational, and according to CEO Jane Fraser, this behavior is overblown.
As we enter 2023, the environment is a little better than we all expected, at least for now, despite aggressive tightening by central banks.
In short, Jane Fraser thinks the situation may not be as rosy as it first appears. After all, the Fed has not yet won its battle over inflation, and is certainly far from winning.
But the Fed remains resolute in dealing with core inflation. That is why we continue to see the US entering a mild recession in the second half of the year.
Finally, it has provided at least one positive in what it believes is a difficult time. According to Jane Fraser, banks, companies, and even consumers are healthy for the moment. So going forward, the question remains how the Fed will manage to curb inflation, which is why the bank also increased its loan loss provisions by about $640 million this year. USD.
Wells Fargo $WFC+1.4%
The most optimistic bank was probably Wells Fargo, which was the only one that did not forecast a recession, but even so, it still has a plan with a scenario that includes a recession in the back of its plans. This relatively high confidence stems from the confidence of CEO Charlie Scharf, who sees the future of his bank very positively.
Although we are not predicting a sharp downturn, we need to be prepared for it and we are a stronger company today than we were a year or two ago. Our margins are wider, our earnings are higher, we are better managed and our capital position is strong, so we feel prepared for a downside scenario if we see a wider deterioration than we currently see or forecast.
Again, however, the company is closely monitoring the impact of high interest rates on its clients and has therefore also decided to increase its provisions to cover outstanding loans by around EUR 957 million as a precaution. USD 955 MILLION.
Summary
Looking at it this way, the 4 largest banks are preparing for the possibility that their clients will not be able to repay their loans or, for example, are preparing for possible losses in the investment area. According to the three banks, we can look forward to a mild recession this year. What all the banks generally agreed on, however, is that the banking sector is in good shape at the moment, as are companies in general and ordinary consumers.
What this year will be like will depend mainly on the Fed's actions, and how well it manages to fight inflation. But one thing is clear. We will see more interest rate hikes this year, which will put further pressure on the economy.
Personally, I think that given that we are only at the beginning of the year, it is relatively early to make any deeper assessment. Quite simply, the banks believe that the economy is currently set up in such a way that if everything continues as it has been, we are looking at a mild recession during this year. Specifically, this could happen sometime in the second half of this year.
WARNING: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.
Sources:
https://www.jpmorganchase.com/ir
https://investor.bankofamerica.com/
