US bank profits to tumble on higher bad loan reserves

Second-quarter profits at big US banks are expected to fall sharply from a year earlier on increased loan loss reserves, as the pandemic recovery gives way to a possible recession.

Analysts expect JPMorgan Chase & Co will report a 25% drop in profit on Thursday, while Citigroup Inc and Wells Fargo & Co will show 38% and 42% profit declines, respectively on Friday, Reuters reports quoting Refinitiv I/B/E/S data.

Bank of America Corp, which like its peers has big consumer and business lending franchises, is expected to show a 29% drop in profit when it reports on July 18.

The plunge in profit stems from lenders adding to their reserves for expected loan losses, a reversal from a year earlier when they benefited from reducing those cushions as anticipated pandemic losses failed to materialize and the economy strengthened.

“Its going to be a shaky quarter for the sector,” said Jason Ware, chief investment officer for Albion Financial Group, which owns shares of JPMorgan and Morgan Stanley (MS.N).

Investors will want to hear executives’ insights into the health of the economy and if borrowers are “more shaky now,” Ware said.

Banks must factor the economic outlook into loan loss reserves under an accounting standard which took effect in January 2020.

While data on Friday showed the U.S. economy added more jobs than expected in June, it could still be on the verge of a recession. Gross domestic product contracted in the first quarter, with tepid consumer spending and manufacturing readings in the last two weeks.

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