A surge in non-performing loans (NPLs) is posing a threat to the positive outlook of investors regarding the fourth-quarter earnings of the United States’ largest banks. Analysts predict that NPLs, representing debts from borrowers who have not made payments in the past 90 days, may have reached a collective $24.4 billion in the last quarter of 2023 for major financial institutions, including JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. This marks an increase of nearly $6 billion compared to the end of 2022.
The consensus among Bloomberg analysts suggests a contraction in bank earnings during the final three months of 2023. This decline is attributed to the burden of unpaid loans and the lingering effects of elevated interest rates, which have escalated deposit costs. Additionally, several major banks announced plans in December to absorb a one-time charge by year-end to cover a special assessment imposed by the Federal Deposit Insurance Corporation, aimed at recovering the $18.5 billion in losses incurred due to the failures of Silicon Valley Bank and Signature in the previous year.
Ongoing cost-cutting measures further contribute to the challenges faced by these financial institutions. Citigroup, currently undergoing its most significant reorganization in years, is expected to incur charges related to layoffs and associated expenses. Wells Fargo, in a recent announcement, earmarked $1 billion for severance costs in the fourth quarter.
Collectively, earnings at the six major banks, including Goldman Sachs and Morgan Stanley, are anticipated to have declined by an average of 13 percent in the last quarter of 2023 compared to the same period in the previous year.
Jason Goldberg, an analyst at Barclays, emphasized the importance of year-ahead outlooks in fourth-quarter earnings calls, anticipating that banks will signal that the recent drop in net interest income will reach its lowest point this year.
Despite the projected earnings decline, investors have shown confidence in bank shares, experiencing a 20 percent increase since the end of October, according to the KBW Nasdaq Bank index. This upward trend is fueled by the Federal Reserve’s indication late last year that it has likely concluded its interest rate hikes. The optimism stems from the belief that the easing of interest rate pressures will positively impact banks in 2024.
However, the potential for a continued rise in unpaid loans remains a concern that could impede bank profits. While the current level of non-performing loans is below the peak of the pandemic at $30 billion, banks have indicated optimism that the increase in unpaid debts could slow down. Yet, a sudden surge in provisions for bad loans could raise alarms for investors.
Scott Siefers, a bank analyst at Piper Sandler, highlighted credit as a wildcard, acknowledging its past positive performance but expressing expectations of deterioration in the future.
Commercial property, especially mortgages on less-occupied office buildings, had initially contributed to the increase in problematic debts. However, recent trends show an uptick in delinquencies on consumer loans, particularly credit cards and car debt, prompting concerns among analysts. The reserves banks are setting aside for loan losses are currently smaller than those allocated at the onset of the pandemic when bad loans were on the rise.
Gerard Cassidy, a bank analyst at RBC Capital Markets, acknowledged the adequacy of current bank reserves in light of current stress levels but raised doubts about whether they are sufficient for a potential economic hard landing.
The upcoming disclosure of results on January 12 by Bank of America, Citigroup, JPMorgan, and Wells Fargo is anticipated to provide a clearer picture of the challenges faced by these banking giants. Goldman Sachs and Morgan Stanley, with business models more focused on investment banking, trading, and asset management, are set to report their results on January 16.
