U.S. banking giants are forecast to report lower fourth quarter profits this week as lenders stockpile rainy-day funds to prepare for an economic slowdown that is battering investment banking.
Four American banking giants -- JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N), Citigroup Inc (C.N) and Wells Fargo & Co (WFC.N) -- will report earnings on Friday.
Along with Morgan Stanley (MS.N) and Goldman Sachs (GS.N), they are the six largest lenders expected to amass a combined $5.7 billion in reserves to prepare for soured loans, according to average projections by Refinitiv. That is more than double the $2.37 billion set aside a year earlier.
"With most U.S. economists forecasting either a recession or significant slowdown this year, banks will likely incorporate a more severe economic outlook," said Morgan Stanley analysts led by Betsy Graseck in a note.
The Federal Reserve is raising interest rates aggressively in an effort to tame inflation near its highest in decades. Rising prices and higher borrowing costs have prompted consumers and businesses to curb their spending, and since banks serve as economic middlemen, their profits decline when activity slows.
The six banks are also expected to report an average 17% drop in net profit in the fourth quarter from a year earlier, according to preliminary analysts' estimates from Refintiv.
Goldman Sachs will start laying off thousands of employees from Wednesday, two sources familiar with the move said Sunday. Morgan Stanley and Citigroup, among others, have also cut jobs after a plunge in investment-banking activity.
The moves come after Wall Street dealmakers handling mergers, acquisitions and initial public offerings faced a sharp drop in their businesses in 2022 as rising interest rates roiled markets.
Global investment banking revenue sank to $15.3 billion in the fourth quarter, down more than 50% from a year-earlier quarter, according to data from Dealogic.
Consumer businesses will also be a key focus in banks' results. Household accounts have been propped up for much of the pandemic by a strong job market and government stimulus, and while consumers are generally in good financial shape, more are starting to fall behind on payments.
