Bank CEOs increasingly turning pessimistic on economy

NEW YORK — Wall Street’s biggest banks’ outlook for the US economy is dimming, with many top executives saying they are bracing for a potential downturn or recession.

After the brief but severe pandemic recession of 2020, many bank CEOs have spent the past year and a half trumpeting the strength of the US economy and the resilience of US consumers. Many did so again Friday after the release of their quarterly results, but this time with an overwhelming sense of caution.

“We are aware that pressure points are building in several areas of the economy that could lead to stress in the future,” said Andy Cecere, CEO of US Bank.

Such comments reflect mounting evidence that the US and global economy is faltering amid global inflation and the war in Ukraine. On Tuesday, the International Monetary Fund lowered its forecast for global economic growth in 2023 to 2.7% from 2.9%.

Half a dozen banks released their quarterly results on Friday, ranging from giants JPMorgan Chase and Citigroup to national banks like US Bank and PNC Financial. In talks with journalists and investors, bank directors painted a two-part picture of the economy.

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On the one hand, they noted low levels of arrears, solid consumer spending and healthy activity from their business customers. At the same time, they acknowledged decades of high inflation, a rapidly slowing housing market, and a Federal Reserve raising interest rates at an unprecedented rate, which will make it harder for companies to borrow.

“Inflation is casting a long shadow over the future prospects of these banks,” said Peter Torrente, national head of US banking and capital markets at accounting giant KPMG

Inflation has been consistently high for months, with consumer prices this week showing a yoy rise of 8.2% in September. Fed officials have hiked their short-term interest rate three times in a row by a whopping three-quarters of a point to a range of 3% to 3.25%, the highest level in 14 years. Wall Street expects another 0.75 percentage point rise in November.

Citigroup, Wells Fargo and JPMorgan reflected the weaker macro view and injected cash into their loan loss reserves. These reserves are set aside to cover potentially non-performing loans. Banks injected tens of billions of dollars into these reserves during the pandemic, but released the bulk of these funds in 2021, reflecting the improving economy.

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Now the banks are increasing their reserves again. JPMorgan has set aside about $1 billion in loan loss reserves, while Citigroup and Wells both invested about $400 million in their reserves this quarter. The pace of additions is slower than at the start of the pandemic, when, for example, JPMorgan injected more than $10 billion into its reserves in one quarter.

The goal of the Fed’s rate hikes is to slow the economy and bring down inflation. The possibility of going too far and triggering a recession is of great concern to economists, Wall Street analysts and bank executives.

Wells Fargo CEO Charlie Scharf told investors in a conference call that the bank expects a weakening in broader economic conditions, which will lead to a rise in arrears and loan losses.

Cecere, the US bank’s CEO, said: “Even though conditions are favorable today, it would not surprise us if an economic slowdown were to develop at some point, driven by lower confidence, leading to lower spending and business investment could lead.”

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Jamie Dimon, CEO of JPMorgan Chase, made headlines Monday when he said a “very, very serious” mix of concerns could lead to a recession in the next six to nine months.

On Friday, Dimon addressed the fact that US consumer health remains strong. Investors pushed for clarity.

“I’m trying to reconcile your comments from before and now,” Mike Mayo, an analyst at Wells Fargo Securities, told Dimon.

In response, Dimon described the current economic environment as “strange.” This reflects the fact that arrears are low and consumer spending remains strong despite inflationary headwinds. However, he predicted that the additional US household savings saved during the pandemic would likely be gone by mid-2023 if inflation is not brought under control.

One thing supporting Dimon’s comments is the amount of spending consumers are making with their credit cards. Wells Fargo, Citigroup and JPMorgan all reported double-digit year-over-year increases in consumer credit card spending.

While JPMorgan executives said some of that spending could be consumers returning to pre-pandemic spending trends, inflation could simply be straining household budgets.

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