Investors awaiting another round of earnings were greeted by a Friday report from the nation’s biggest banks that showed profits soared in a sector boosted by the Federal Reserve. high interest rate environment,
However, investors may be shocked when banks like JPMorgan Chase & Co. jpm said they are increasing their provisions for bad loans, as they are prepared for what they say base-case mild deceleration,
What happened? JP Morgan Chief Executive Jamie Dimon Said on Friday that its fourth-quarter profit rose 6%, boosted by rising interest rates that sent its core lending income to a record high.
The bank posted net income of $11.01 billion, or $3.57 per share, beating consensus estimates of $3.08 per share.
But, JPMorgan also said it made a $2.3 billion provision for bad loans in the quarter, a 49% increase from the third quarter, setting aside money for anticipated delinquencies as its US clients accumulate bad loans. Speaking to reporters, Dimon said, “It could be a mild recession. It can’t be,” according to Wall Street Journal.
Chase wasn’t the only bank to increase provisions for bad loans.
Bank of America Corp. BAC It also took a step down on its reserves for bad loans, adding $403 million, reversing a release of $851 million in reserves a year ago.
Citigroup Inc C did too, adding $640 million to bad consumer credit loans.
Why it matters: It’s important to understand the ambivalent relationship between the Fed’s interest rates and its effects on banks.
On the positive side, higher interest rates can boost bank profits – we saw this on Friday when banks released earnings.
When the Fed raises interest rates, banks are able to charge higher interest rates on loans, which can lead to higher revenue for the bank.
Additionally, banks often invest a portion of their assets in Treasury bonds and other fixed-income securities. As interest rates rise, the value of these investments increases, which can also contribute to increased profits for the bank.
On the other hand, the current high-interest rate environment increases the cost of borrowing for consumers and businesses. This can lead to a reduction in borrowing and spending, which can ultimately have a negative impact on economic growth.
As interest rates rise, banks may also experience an increase in defaults on loans – which is why most of them are increasing provisions for defaults and defaults. Often there is a sign of economic recession in the coming times.
While banks are getting ahead of the curve, preparing for an economic downturn, their earnings reports do not show a future recession.
Historically, during recessions, banks see a reduction in the demand for loans which ultimately leads to lower revenue from interest rates and fees.
JPMorgan said on Friday that spending on credit cards rose 12% from a year earlier and debt on cards rose 20%. It also said that total loans rose 5% as large and medium-sized businesses borrowed more.