US banks build up reserves on inflation risk, Russia; acts a bright spot

WASHINGTON, April 14 (Reuters) – Some major US banks have again started raising cash to mitigate potential loan losses due to growing concerns over the war in Ukraine and the impact of inflation on the US economy, although trade remains a bright spot for Wall Street .

JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N) and Citigroup Inc (CN) together put $ 3.36 billion in credit loss reserves aside in the first quarter, the banks said.

It is a reversal from the last 12 months, where lenders released reserves after COVID-19-related losses failed, signaling that lenders believe the economic recovery from that crisis may be short-lived as inflation rises and Ukraine the conflict confuses markets and dampens global growth. .

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“The prospect of higher interest rates and declining economic growth is likely to mean increased credit losses,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York.

“Banks do not see much in the way of current economic problems, just the likelihood that weaker economic conditions are likely to develop.”

Citigroup, the most global US bank, carried the bulk of it, adding $ 1.9 billion to its reserves related to Russia’s exposure and the broader macroeconomic impact of the war. The bank’s executives said it could lose $ 2.5 to $ 3 billion on its exposure to Russia.

JPMorgan, the country’s largest lender, on Wednesday added $ 902 million to its reserves, driven by “the likelihood of downside risks due to high inflation and the war in Ukraine,” as well as taking into account Russia-associated exposure. It has said it could lose $ 1 billion on its Russia exposure over time.

Goldman also cited “macroeconomic and geopolitical concerns” among other reasons for its $ 561 million provision, saying it will take $ 300 million in the first quarter from Russia.

Rising inflation could put pressure on consumer spending, while aggressive Federal Reserve rate hikes aimed at curbing prices are likely to slow lending growth, analysts said.

The war in Ukraine and Western sanctions could slow global growth by more than 1% this year and add two and a half percentage points to inflation, the OECD has said. Read more

Still, some banks like Morgan Stanley N> and Wells Fargo & Co (WFC.N) have little direct exposure to Russia. Wells Fargo, a domestic-focused bank with a small capital market business, actually released $ 1.1 billion in pandemic reserves. Read more

Wells CEO Charles Scharf nevertheless warned of the economic outlook in a tone change from previous quarters, noting that rate hikes “certainly” will reduce growth. “The war in Ukraine adds further risk to the disadvantage,” he added.

Wells Fargo’s shares fell 6% and Citi’s rose almost 2%.

TRADE, M&A

However, the banks’ trading business performed better than analysts had expected, as customers rejected portfolios in response to expected interest rate rises and the war. Read more

Analysts had predicted a fall in trading turnover of 10% to 15% across the board compared to 2021, when the central bank’s moves to stimulate the economy in the midst of the pandemic saw stock indices reach record highs and drive a trading bonanza across Wall Street.

Goldman Sachs said global market revenue increased 4% in the first quarter, driven by a 21% increase in interest income. Morgan Stanley’s total trading revenue fell only 6%. Banks’ share prices rose 1.3% and 2.7%, respectively. L3N2WC2E1]L3N2WC2EO

“Equities and bonds again delivered exceptional results, especially in Asia and Europe, as we supported our global clients amid a turbulent backdrop,” CEO James Gorman told analysts at a conference call.

JPMorgan also reported better-than-expected trading performance on Tuesday, with total market revenue of just 3% compared to last year. Read more

Equity insurance fees fell, however, as stock quotes dried out due to volatility. Goldman Sachs and Morgan Stanley both reported an 83% drop in equity insurance income.

The picture for the M&A consulting firm was mixed. Managers said pipelines remain healthy, but some companies are pausing transactions until markets stabilize. Some agreements entered into before the war ended in the first quarter.

Morgan Stanley said advisory revenue nearly doubled from a year ago driven by completed M&A transactions. Goldman Sachs said the revenue of its consulting firms was “essentially unchanged.”

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Additional reporting by Elizabeth Dilts and Katanga Johnson; Edited by Nick Zieminski

Our standards: Thomson Reuters Trust Principles.

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