NEW YORK (Reuters) – As major U.S. commercial banks close their books in the third quarter, analysts expect them to report a 30% to 60% drop in profits from the period of last year due to the pandemic-induced recession and near record high interest rates.
This decline in third quarter net income comes even though lenders will not be making inordinate allowances for expected loan losses as they did in the first and second quarters.
And, while capital market and investment banking income is expected to drop from 5% to 20%, that will not be enough to offset the decline in interest income on loans and securities.
“You have weak loan growth and you are still feeling the impact of aggressive Fed actions earlier this year,” Barclays analyst Jason Goldberg said.
Citigroup IncCN and Wells Fargo & CoWFC.N, the third and fourth largest U.S. banks in terms of assets respectively, will report net profit down about 60%, according to data from the I / B / E / S survey from analysts at Refinitiv.
JPMorgan Chase & CoJPM.N and Bank of America CorpBAC.N, which rank first and second in terms of assets respectively, are expected to post profits down around 30%.
Investment Banks Goldman Sachs Group Inc GS.N and Morgan Stanley MS.N, which benefit from greater concentration in busy capital markets, are expected to register more modest profit declines of around 5% to 10%.
JPMorgan and Citigroup will kick off the third quarter banking results season on October 13.
Lockdowns caused by a pandemic have put tens of millions of Americans out of work and plunged the United States into a recession. US production set to drop 3.7% in 2020, Federal Reserve says here last month. It’s not as bad as feared earlier in June, allowing banks not to increase their loss reserves.
At a Barclays online investor conference last month, bank executives said consumers paid off credit card debts during the recession and businesses avoided bank lending. Large companies were instead able to raise liquidity via the bond markets, supported by the Fed.
Consumer loans by major U.S. banks also fell about 3% in the quarter from a year earlier, according to data from the Fed.
As markets plunged in March, the central bank cut overnight interest rates to near zero and launched a massive securities buying campaign. These purchases and an increase in the savings of worried consumers have flooded banks with more deposits than they can lend or risk investing in longer-term securities.
Stuffed with cash, banks’ net interest margins – the spread between the cost of money and what they earn on loans and securities – fell to their lowest level in 35 years in the second quarter, according to a study by Goldman Sachs.
Report by David Henry in New York. Editing by Michelle Price and Chizu Nomiyama