At the end of the week, the largest banks in the USA will publish their annual results. The expected increase in non-performing loans is likely to be an explosive topic – this leads to interesting Swiss parallels.
The provisions at Julius Baer in November had startled many investors: a large loan position, probably in connection with the insolvency of the Austrian Signa Group, had caused the measure worth 70 million francs.
The topic has reached Switzerland not only because of Signa. The number of company bankruptcies due to excessive indebtedness rose by 8 percent last year to a total of 7,335 companies, according to figures from the Swiss Creditors’ Association Credit reform could be seen.
Provisions rather reduced
In contrast, almost all Swiss banks have recently reduced their provisions for loan defaults, which, in addition to the higher interest margin, has supported the results.
Compared to the USA and the Eurozone, interest rates (and inflation) in this country are still low. This and the stable economic expectations have stabilized investor sentiment for the banking sector.
US banks put cards on the table
The parallels across the “Big Pond” are now exciting, where the annual figures for the largest American banks will soon be available.
In the USA, the recent increase in investor optimism about the prospects of a “soft landing” had also strengthened the confidence of the largest US banks. But that could put a damper on it. According to the agency «Bloomberg» Analysts expect a sharp increase in non-performing loans. Earnings are likely to have shrunk in the final quarter of 2023 due to unpaid debt and the impact of high interest rates.
According to estimates, the volume of non-performing loans at the four largest US financial institutions – JP Morgan Chase, Bank of America (BofA), Wells Fargo and Citigroup – has increased to a combined $24.4 billion. That’s almost $6 billion more than at the end of 2022.
“Bad loans” are loans overseas where the debtor has not made any payment within 90 days.
Filling billion-dollar gaps
The unpaid loans and the higher cost of deposits due to higher interest rates are likely to weigh on the results. In addition, some major banks announced last December that they wanted to make a one-time charge for a special levy to the Federal Deposit Insurance Corporation by the end of the year. This is intended to increase the $18.5 billion gap in the insurance fund caused by the collapses of Silicon Valley Bank and Signature Bank.
In addition, the costs of ongoing restructuring at Citi and Wells Fargo are likely to weigh on earnings. Citi is in the midst of its biggest restructuring in years; Wells Fargo announced in December that the bank would set aside $1 billion for severance payments.
On average, the profits of the six major banks, which also include Goldman Sachs and Morgan Stanley, are expected to be 13 percent lower. On January 12th, BofA, Citi, JP Morgan and Wells Fargo will present their quarterly figures. Goldman Sachs and Morgan Stanley will follow on January 16th.
Personal loans viewed with concern
“A lot of attention will be paid to full-year forecasts in fourth-quarter earnings releases,” says Barclays analyst Jason Goldberg in the British newspaper «Financial Times» (article subject to payment) quoted. “I expect banks to point out that the recent decline in net interest income will bottom out this year.”
But even if pressure on interest rates eases, a spike in unpaid loans could weigh on banks’ profits. The provisions for this had been reduced in recent quarters. If provisions for bad loans rise unexpectedly, this could alarm investors. In particular, the areas of mortgages for commercial real estate and private loans are being watched with concern.
This brings back memories of the US banking crisis in spring 2023, which helped accelerate the end of the major bank Credit Suisse (CS) in Switzerland.
Reserves big enough?
The banks’ reserves for loan defaults are currently significantly lower than at the beginning of the corona pandemic. “The banks’ reserves are adequate at the moment because we don’t have nearly as much stress as we did back then,” he said Gerard Cassidy, a banking analyst at RBC Capital Markets, told the Financial Times. “But are they big enough for a hard economic landing? The answer is no »
Do the US presidential elections have an impact on the stock market?
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Yes, the stock market prices will rise because the candidates make a lot of promises.
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Yes, prices will rise because Donald Trump’s chances are getting better and better.
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The US elections don’t matter – prices will rise because interest rates fall.
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Yes, if Joe Biden wins, stock prices will fall.
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Yes, because the elections give Americans new self-confidence.
2024-01-08 13:21:02
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