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Big bank CEOs urge caution, warn on loan losses after 'interesting' 2023

Bank executives at the Goldman Sachs US Financial Services Conference in Manhattan on Tuesday continued to reiterate to investors the industry's key themes of the year — caution, care, and conservatism.

Executives from some of the country's biggest banks noted the resilience of the US economy, but warned loan losses are likely to continue and urged restraint regarding 2024 outlooks.

"2023 has been an interesting year," Goldman Sachs (GS) CEO David Solomon said. Solomon rattled off the concerns financial institutions faced this year, including a regional bank crisis in the spring, a rapid rise in interest rates, and geopolitical risks.

For the US economy, Solomon said "the chance of a soft landing is much higher," referring to the idea the Federal Reserve could bring inflation back to its 2% target without causing a recession. Still, Solomon said it made sense to remain "cautious" as the firm approaches 2024.

Bank of America (BAC) CEO Brian Moynihan was firmer in his assessment of the economy, saying, "The economy has entered a soft landing. It's set up."

Bank of America Chairman and CEO Brian Moynihan speaks at the ReutersNEXT Newsmaker event in New York City, New York, U.S., November 8, 2023. REUTERS/Brendan McDermid
Bank of America CEO Brian Moynihan speaks at the ReutersNEXT Newsmaker event in New York City, Nov. 8, 2023. (Brendan McDermid/REUTERS) (Brendan McDermid / reuters)

Moynihan noted the firm's data showed consumer spending is growing at a pace of about 4%, less than half the 9% growth seen from 2021 to 2022.

"The way customers are spending their money is leveled out," Moynihan said. "It's not a credit risk question. It's just their appetite [for] credit is down."

Read more: How to manage a personal loan: 5 tips for paying off your loan faster

Bank of America anticipates the Fed will cut interest rates two or three times next year and four times in 2025.

"This will be higher for longer, but higher in the context that we sort of won the war on inflation," Moynihan said. "We've got to be careful not to win it by too much right now."

'We do expect to see losses'

JPMorgan (JPM), Bank of America, Wells Fargo (WFC), and Citigroup (C) all increased the amount of loans they wrote off as losses last quarter, with those combined charge-offs totaling $5.2 billion.

The total was the highest amount collectively for the four lenders since the early days of the pandemic, in the second quarter of 2020. Drawing from their more diversified revenue streams, these banks have been able to set aside higher portions of capital to absorb loan losses relative to smaller banks.

"We do expect to see losses this quarter and continue into next year," Wells Fargo CEO Charles Scharf told the conference, speaking specifically about the bank's commercial real estate portfolio. "We're relatively conservatively reserved," Scharf added, referring to capital the firm has on hand to absorb expected losses.

Executives for these big money centers were also quick to frame more charge-offs as returning to the pre-pandemic average.

But it's been a tough year overall for the banking industry, which has seen nearly a trillion dollars in deposits leave its institutions. Those outflows have forced firms to cut back on lending, and in many cases shrink their balance sheets by shedding assets or letting go of workers.

Both Bank of America and Wells Fargo are seeing higher-than-expected employee retention. Bank of America said it rotates its workforce into different parts of the bank, to avoid losing workers.

For Wells Fargo, which has consistently been trimming its workforce for the past several quarters, severance costs will be higher than previously expected as a result of this more static workforce through the end of the year.

"We're looking at something like $750 million to a little less than $1 billion of severance in the fourth quarter that we weren't anticipating just because we want to continue to focus on efficiency," Scharf said.

Goldman Sachs also expects rising compensation costs “up low to single digits for the full year” compared to last year’s full year $15.1 billion total according to CFO Dennis Coleman.

The stock of Bank of America and Wells Fargo fell more than 1% Tuesday by noon New York time while Goldman’s stock fell more than 2%.

With all but the largest banks still recovering from the turmoil triggered in the spring, bank stocks have been a laggard this year, with the KBW Nasdaq US bank index (^BKX) down about 14% this year against a 19% gain for the S&P 500.

Last week, however, the index capped off the month of November with its best monthly performance since February 2021.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.

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