Increased Loan-Loss Provisions Projected in Upcoming US Bank Earnings, Resurgent Rates Apply Pressure

Estimates for US bank earnings suggest increased defaults on loans from large American lenders, as well as greater provisions for more losses lie ahead. Higher loan-loss provisions could prove to be an eventual boon for bank profits if gloomy economic forecasts are overdone, but they may also be a harbinger of more pain ahead for shareholders.

More critical near-term factors for most banks will be deposit flows, the intensity of unrealized losses on debt securities, and the continued reliance on liquidity assistance provided by the Federal Reserve. There is still more than $100 billion in advances on loan from the Fed, provided by the new Bank Term Funding Program (BTFP), and secured by collateral that is worth much less on the market than the liquidity being offered. That number is still trending higher alongside US treasury yields, suggesting many banks are still feeling pressure.

Related ETFs: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE)

Earnings season is set to kick off this week for the US’s beaten down banking sector, which should give a much clearer picture of how depository institutions are managing lingering uncertainty, weaker deposit levels, and slowing economic growth.  Per Bloomberg, JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – representing the six largest US banks – are predicted to have written off a collective $5 billion tied to defaulted loans in Q2. That is nearly double the total from the same quarter a year ago.

Credit cards were likely a key problem area for bank lending in Q2, with loan charge-offs for JPMorgan potentially ballooning to $1.1 billion. TransUnion data shows total credit card debt reached a record $930.6 billion in the fourth quarter of 2022, rising 18.5% YoY. That balance dipped to roughly $917.0 billion in the first quarter, likely spurred by the average APR across all credit card accounts closing in on 20.1% in February, a series high. Still, banks appear to expect more losses ahead, as the Financial Times reports the six largest US lenders will set aside an estimated additional $7.6 billion to cover more loans that could go bad.

However, if gloomy economic forecasts are overdone, a rebuilding of loan-loss provisions may represent a positive prospect for banks’ future profitability. In 2020, many banks expected COVID-19 to slam their loan books and create huge losses in their lending departments. While the economy essentially…