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Top US banks have reported a largely mixed set of earnings for Q4 2022. However, some of the most recent figures have been overshadowed by increasingly dreary expectations for the future. More and more references to recession have been cited on earnings calls and provisions for potential credit losses are beginning to rise more rapidly.

Reserves to offset losses on lending are booked against profits in the current term and have a dampening effect on earnings figures. However, if the losses aren’t as bad as expected, as was the case in the immediate aftermath of the COVID-19 pandemic, any remaining reserves can be released in the future and booked as profit on paper. These played a key role in surging share prices of US banks throughout the 2020-2021 period and, if a potential economic downturn is shallower than expected, could eventually become a renewed feature of financial sector earnings.

Related ETFs: SPDR S&P Bank ETF (KBE), Financial Select Sector SPDR Fund (XLF)

A spate of US bank earnings, reported throughout the past two weeks, exhibited mixed results for the financial sector in the final quarter of 2022. Though the likes of JP Morgan Chase and Bank of America were able to increase revenue and preserve profitability, other peers like Morgan Stanley and Goldman Sachs witnessed serious declines in income.

Those metrics weren’t totally instructive about which way the companies’ shares traded, however. Despite a 40% drawdown in net income, Morgan Stanley has experienced the largest post-earnings bump among big banks, gaining on its more robust wealth management business that has benefitted from higher rates and a strong confidence among executives that 2023 will herald a turnaround in investment banking once the Fed eases their pace of tightening. “We are not heading into a dark period,” CEO James Gorman told investors.

Not everyone is so confident. Many banks are once again beginning to significantly increase the size of their loan-loss reserves, as they previously did during the initial outbreak of COVID-19. Increasing provisions for losses in the lending department signal banks’ expectation that the economic conditions are set to worsen and a meaningful portion of the credit they’ve extended will…

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