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JPMorgan Chase, Citigroup, and Wells Fargo are scheduled to release their earnings on July 14. Above, the New York Stock Exchange.
Spencer Platt/Getty Images
As if banks didn’t have enough to contend with this year, a worsening economy could leave lenders with bigger credit losses. But to hear Wall Street tell it, that is more a reason for concern than for outright worry.
“Our view is that losses will increase over the next few years, with our loss estimates above consensus but well below the magnitude of past loss cycles,” Ken Usdin, analyst at Jefferies, wrote in a note Tuesday. As his team sees it, if net charge-offs against loan-loss reserves were to increase by 20%, the impact to the median bank would be a 3% blow to earnings per share for 2024.
Since the pandemic, banks have suffered fewer credit losses thanks to the amount of stimulus pumped into the economy. But with the easy-money policies in the rearview mirror and consumers’ cash piles dwindling to prepandemic levels, there are worries that borrowers won’t be able to pay their debts. The problem could be exacerbated if the Federal Reserve feels it needs to continue to keep monetary policy tight to fight inflation.
“Incremental hikes and/or an extended “higher-for-longer” scenario could have negative implications for credit quality, as it would burden ability to pay and increase the potential for a hard landing,” Usdin wrote.
The picture isn’t exactly pretty, but it could be worse. Analysts are less worried about the impact for banks because balance sheets are in a better position today than they were in other credit cycles, so lenders are equipped to deal with “meaningful increases” in nonperforming loans and net charge-offs, according to Usdin. He sees NCOs increasing to 0.58% of banks’ loans outstanding in 2024 from 0.20% in the first quarter of 2023, but remaining well below the levels of 1% or more that typically occur during a recession.
One area to watch is commercial real estate loans, which have gotten a lot of attention because businesses need less space in a hybrid work environment. The key thing to pay attention to is when the loans are due. Those payable sooner, while rates are rising, present a bigger default risk than those due in a few years, when borrowing costs are likely to be declining.
In any case, Usdin noted, office properties account for only 2% of the loan books for large-cap banks and 4% of mid-cap bank exposure.
The nation’s largest banks sailed through the Fed’s annual stress test last year with little difficulty even as the test asked lenders to prove they could stand up to a scenario where commercial real estate prices fell 40%.
Investors will have more of a chance to assess banks’ health on July 14, when
JPMorgan Chase
(ticker: JPM),
Citigroup
(C), and
Wells Fargo
(WFC) post their earnings.
Write to Carleton English at [email protected]
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