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'Things probably will get worse' — Big banks brace for an economic downturn: Morning Brief

·Anchor/Reporter
·3 min read

This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Tuesday, July 19, 2022

Today's newsletter is by Brian Cheung, an anchor and reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

The largest banks in the United States said the American consumer has never looked so good.

All while readying their recession playbooks as the economic outlook deteriorates.

As JPMorgan Chase (JPM) CEO Jamie Dimon said Thursday, “there’s a range of potential outcomes.”

And bank earnings over the past several days show companies making preparations for those that are more negative.

Last week, JPMorgan Chase and Citigroup (C) suspended share buybacks to give themselves "maximum flexibility" through the bear market. And on Monday, Goldman Sachs (GS) said it would “slow hiring velocity” as it navigates 2022’s choppy market waters.

David Solomon, Chairman and CEO of Goldman Sachs, speaks at the 2022 Milken Institute Global Conference, in Beverly Hills, California, U.S., May 2, 2022.  REUTERS/Mike Blake
David Solomon, Chairman and CEO of Goldman Sachs, speaks at the 2022 Milken Institute Global Conference, in Beverly Hills, California, U.S., May 2, 2022. REUTERS/Mike Blake

“Banks are always going to try and get ahead of the curve,” said Devin Ryan, director of financial technology research at JMP Securities, a Citizens company.

Another precautionary measure: beefing up allowances for loan losses, or the buffers that absorb the blow of households and businesses missing loan payments or defaulting on the loan entirely as financial fortunes falter.

Wells Fargo (WFC) was among the banks that showed a tick up in its allowances during the second quarter. “We think it’s very much indicative of a view that things will probably get worse,” Wells Fargo CFO Mike Santomassimo told reporters Friday.

Still, a combination of loan growth and higher interest rates gave banks a nice boost between March and June.

Bank of America (BAC) was a bit more optimistic in its earnings release Monday, as its allowance for loan losses was essentially flat between the first and second quarters. CFO Alastair Borthwick credited a strong American consumer, buoyed by “robust” employment levels and a strong capacity to borrow.

But Borthwick nonetheless told reporters Monday morning that the post-pandemic trend of declining buffers “are likely behind us,” as recessionary worries risk ending the post-pandemic trend of improving credit quality.

Bank analyst Gerard Cassidy told Yahoo Finance that the reversal in borrower health was inevitable, noting that loan repayments and delinquencies post-pandemic appeared to be better than other comparable cycles.

“Even if we don’t have a slowdown or a recession, the delinquency numbers naturally are going to rise because they’re just at unsustainably low levels,” Cassidy said Monday.

Cassidy added that he doesn’t expect to see 2008 or 2009-like numbers for the banks, where defaults on mortgages spilled over into a full blown global financial crisis.

But the concerns illustrate that the second quarter of 2022 may have been the inflection point for the economic recovery out of COVID.

What to Watch Today

Economic calendar

  • Housing starts, June (1.590 million expected, 1.549 million during prior month)

  • Building permits, June (1.673 million expected, 1.695 million during prior month)

  • Housing starts, month-over-month, June (2.7% expected, -14.4% during prior month)

  • Building permits, month-over-month, April (-1.3% expected, -7.0% during prior month)

Earnings

Pre-market

  • Johnson & Johnson (JNJ), Truist Financial (TFC), Interactive Brokers (IBKR), J.B. Hunt Transport (JBHT), Cal-Maine Foods (CALM), Ally Financial (ALLY), Lockheed Martin (LMT), Hasbro (HAS), Halliburton (HAL)

Post-market

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