US Major Banks Bracing For Surge In Bad Loans

Major US banks face a sharp rise in bad loans, with a combined $24.4 billion in unpaid debts impacting last quarter's earnings.

Is it a good time to invest in the US banking sector?

The United States' largest financial institutions are poised to reveal a substantial increase in non-performing loans in their fourth-quarter earnings reports, sparking concerns over the health of the banking sector. JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup are expected to report a combined $24.4 billion in bad debts for the final quarter of 2023, a significant rise from the end of 2022.

JPMorgan Chase building
JPMorgan Chase: The largest bank in the US, with $3.38 trillion in assets and a customer base of 80 million. (Photo: Matt Rourke)

Earnings Decline Amid Rising Loan Defaults

Analysts predict that the earnings of these major banks suffered in the last quarter of 2023, primarily due to the escalation in unpaid debts. The impact of higher interest rates, which have increased deposit costs, also contributed to this downturn. Furthermore, banks like Citigroup are undergoing major restructurings, including layoffs, leading to additional charges. Goldman Sachs and Morgan Stanley, with a focus on investment banking and asset management, are also expected to reflect similar trends in their upcoming earnings reports.

The Balance Of Rising Interest Rates And Bank Profits

Despite a forecasted average earnings drop of 13% in the last quarter of 2023 compared to the same period in the previous year, investor confidence in bank shares has risen, as evidenced by a 20% increase in the KBW Nasdaq Bank index since October. This optimism stems from the Federal Reserve's indication of halting interest rate hikes. However, the burgeoning issue of unpaid loans continues to cast a shadow over potential bank profits.

The Outlook For Loan Provisions And Credit Risks

Banks have been adjusting their provisions for bad loans, with a trend towards reducing these allocations observed in the third quarter of 2023. The current levels of non-performing loans, although not as high as the $30 billion peak during the pandemic, still pose significant concerns. Analysts are apprehensive, particularly with rising delinquencies in consumer loans like credit cards and car debts, questioning whether banks have set aside sufficient reserves for potential economic downturns.

Upcoming Bank Earnings Reports: A Critical Indicator

The forthcoming earnings reports from Bank of America, Citigroup, JPMorgan, and Wells Fargo on January 12, followed by Goldman Sachs and Morgan Stanley on January 16, are highly anticipated. These reports are expected to provide crucial insights into the banking sector's resilience and its preparedness for potential economic challenges ahead.

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