The six U.S. biggest banks underperform in the second quarter

As the economic rebound gives way to a potential recession, big U.S. banks' second quarter profits are anticipated to decline dramatically from a year earlier on increasing loan loss reserves.

According to Refinitiv I/B/E/S statistics, analysts anticipate that JPMorgan Chase & Co. will report a 25% reduction in profit on Thursday, while Citigroup Inc. and Wells Fargo & Co. will report profit declines of 38% and 42%, respectively, on Friday.

When it releases its financial results on July 18, Bank of America Corp., which, like its competitors, has significant individual and corporate lending franchises, is anticipated to reveal a 29 percent decline in profit.

In contrast to a year ago, when they gained from cutting these cushions as feared pandemic losses did not materialize and the economy improved, bankers are again increasing their buffers for expected loan losses, which is what is causing the drop in profit.

A new accounting standard that became effective in January 2020 requires banks to take the economic forecast into consideration when setting loan loss reserves.

Despite figures released on Friday showing the U.S. economy had more employment than anticipated in June, a recession may still be imminent. According to Reuters, the first quarter's gross domestic product declined due to weak industrial and consumer spending estimates.

According to RBC Capital Markets bank analyst Gerard Cassidy, the banks will need to increase their reserves.

Cassidy said that the four biggest lenders in the nation—JPMorgan, Citi, Wells Fargo, and Bank of America—could record $3.5 billion in loss provisions as opposed to $6.2 billion in benefits when they reported reserves last year.

The bottom lines of the banks will appear worse as a result than their core companies. "Pre-provision, pre-tax profits for the big four" will decline by only 7%, predict analysts at Barclays led by Jason Goldberg.

As businesses have begun to borrow more and consumers have resumed using credit cards, banks are also increasing their reserves in preparation for additional loans.

Jamie Dimon, the CEO of JPMorgan Chase, issued a hurricane warning about the economy last month, while James Gorman, the CEO of Morgan Stanley, has stated that a recession has a 50% probability of occurring.

A 17% decrease in profits is anticipated at Morgan Stanley, the sixth-largest U.S. bank by assets and a significant Wall Street participant, according to a Thursday report.

 The fifth-largest bank, Goldman Sachs is anticipated to announce a profit decline of 51% by July 18.

In comparison to the four largest banks, Goldman and Morgan Stanley lend to consumers and businesses less frequently, thus changes to their loan loss provisions have less of an impact on their bottom line.

However, due to increasing volatility, trading revenue is likely to climb, partially offsetting the expected significant decline in fees Goldman receives on contracts, including stock and bond underwriting.