Big US banks have a bad loan problem
The buildup of bad loans threatens to spoil investors' growing optimism about the prospects of major U.S. banks as they release fourth-quarter results this week.
According to the assessments of Bloomberg analysts reported by FT , in the last three months of 2023 non-performing loans (debts linked to borrowers who have not made payments in at least the last 90 days) would have risen by as much as 6 billion dollars in a year to 24 .4 billion dollars for the four largest US lenders: JPMorgan Chase, Bank of America, Wells Fargo and Citigroup.
Analysts estimate that banks' profits shrank in the final three months of 2023, dragged down by these unpaid loans and the lingering impact of rising interest rates, which pushed up the cost of deposits. Additionally, in December, some large banks said they planned to incur a one-time expense later this year to pay a special assessment imposed by the Federal Deposit Insurance Corporation to recoup the $18.5 billion that i Failures at Silicon Valley Bank and Signature have cost the regulator's insurance fund.
In total, earnings at the big six banks, including Goldman Sachs and Morgan Stanley, are expected to have fallen by an average of 13% in the final three months of 2023 compared to the same period a year earlier. This will lead to major cost cuts to maintain profitability, and that means layoffs. Citigroup, which is in the midst of its biggest reorganization in years, will likely take on a charge to cover layoffs and other related expenses. Wells Fargo last month said it would set aside $1 billion for severance costs in the fourth quarter.
Despite the expected drop in earnings, investors have been buying bank shares, which have risen 20% since the end of October, according to the KBW Nasdaq Bank Index. Fueling the rally was the signal from the Federal Reserve, which at the end of last year declared that it was probably finished raising interest rates.
But even as interest rate pressure is easing, a rise in unpaid loans could continue to dampen banks' profits. The current level of bad loans is still below the peak of $30 billion reached during the pandemic. Big banks have said they believe the rise in unpaid debts could slow soon. In the third quarter, some banks reduced the amount of money set aside for future bad loans, the so-called provisions, but if this slowdown in bad debts did not occur it would be a problem for the solidity of the banks.
Commercial real estate, and particularly mortgages on less filled office buildings, have been a major driver of the rise in problem debt. CRE will be a problem in 2024, as office space is increasingly used less and less thanks to remote working.
More recently, however, delinquencies have increased on consumer loans, particularly credit cards and auto debt. This has made some analysts nervous, especially because the reserves that banks are setting aside for loan losses are considerably lower than those they set aside when bad loans surged at the start of the pandemic. So banks will have to set aside much larger amounts to deal with missed loan payments. A situation that could be a problem if the growth in bad debts continues.
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The article Big US Banks Have a Bad Credit Problem comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/le-grandi-banche-usa-hanno-un-problema-di-crediti-in-sofferenza/ on Mon, 08 Jan 2024 10:44:17 +0000.