United States of America
Rising U.S. interest rates have exacerbated stress among borrowers, with losses on commercial real estate mounting, while lenders themselves, on the other hand, have not been spared, with loan losses rising by a record high. Since the corona epidemic .. how is that?
This week, the largest U.S. banks are set to report the “biggest increase in loan losses” since the onset of the coronavirus pandemic; rising interest rates are putting increasing pressure on borrowers across industries.
The move comes amid revelations in an S&P Global Market Intelligence report According to reports, the number of bankrupt companies in the United States in the first half of 2023 will exceed the number of bankruptcies during the new crown epidemic.
According to Epiq data, the number of bankrupt companies in this area reached 2,973, an increase of about 68% over the same period in 2022.
Against this backdrop, a report in the Financial Times on Monday said second-quarter results are expected to show that while banks have benefited from higher interest rates (by boosting lending and investment income), they Post-default, repayments were relatively low, fueled in part by the monetary stimulus of the pandemic and other government aid, and lenders also began to see the negative impact of high interest rates and inflation on borrowers.
The report states:
- The country’s six largest banks (JP Morgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) expect to write off a total of $5 billion in bad loans in the second quarter of this year. Based on the average estimate of bank analysts compiled by Bloomberg.
- Analysts estimate that the six banks will set aside an additional $7.6 billion to cover loans that may default. Both figures are almost double the same quarter last year.
- Those rates are still lower than the hits big banks took at the start of the pandemic, when discounts and reserves peaked at $6 billion and $35 billion, respectively.
Economic researcher and financial systems expert Zaid Al-Barzanji said in an exclusive statement to Sky News Arab Economics:
- The risk to these banks is not significant; as it has sophisticated risk calculations and is prepared to handle an increase in these loan failures at current levels.
- There’s also what’s called a shock analysis and its impact on loans, inter-bank impacts, and so on.
- As it turns out, the Fed is ready to support the banks without reservation, whatever it takes.
He pointed out that one of the important factors here is whether the level of interest rates will continue to rise; because the higher the interest rate, the greater the possibility of default; especially floating rate loans, which rise with the increase of central bank interest rates.
“When risk is recalculated, banks typically start reducing funding and lending levels to reduce exposure to that risk,” he explained, adding: “In the short term, I don’t see a problem or a problem with Bank of America. at great risk.”
Commercial Real Estate Loans
Against this backdrop, British newspapers reported:
- Credit cards are the biggest headache for many banks.
- Analysts estimate JPMorgan’s second-quarter revenue totaled $1.1 billion, up from $600 million a year earlier.
- At Bank of America, credit card loans account for about a quarter of debit card transactions. “
- Commercial real estate loans have also been shown to affect bank performance. Despite the end of the pandemic, landlords are facing reduced demand for office space as remote and hybrid work arrangements continue.
But Jay Ritter, a visiting professor at the University of Florida in the US, said in an exclusive statement to the Sky News Arab Economy website: Banks classify loans as non-performing when borrowers default on their repayments. Bad loans are also a sign of future defaults. Investors can predict what might happen in advance, however, bad loans are a lagging indicator of a bank’s health.
“Banks are regulated, and regulators use these lagging indicators to measure how banks are doing,” he said. “If these accounting numbers look really bad, regulators will tell banks to either issue equity, which increases the bank’s capital, or Less lending, which could hurt the economy.”
He continued, “Some banks are trying to mislead regulators by giving more money to borrowers who would not otherwise pay interest so that borrowers can use the money in new loans to continue paying interest on existing loans.”
Going back to the report of the British “Financial Times”, according to the aforementioned content, it also pointed out:
- Investment banking can also hurt earnings.
- Revenues at Wall Street affiliates of banks and corporate advisory firms are expected to fall again in the current quarter as deal activity has been lacklustre and lasted longer than many executives expected.
- Deal yields, which have soared in recent years, are expected to slow amid financial market turmoil.
more positives than negatives
However, the outlook for major U.S. banks is not bleak, as confirmed by banking analysts who, according to the aforementioned report:
- For most major banks, the upside from a rate hike is likely to outweigh the downside.
- On average, analysts expect the six largest U.S. banks to report earnings per share growth of 6% year-over-year.
The biggest banks “have been a good place for investors to hide as they worry about liquidity at regional banks and concerns about increased regulation,” bank analysts Christopher McGraty and David Conrad at KBW Financial Services wrote in a note to clients. “Environmental challenges facing global banks.
Muhyiddin Kassar, an American economist and financial risk expert, agrees, saying in an exclusive statement to Sky Arab Economic News, “As part of risk management, banks typically consider these Non-Performing Loans. Loans that fluctuate according to the global economic situation.
Banks face a range of variables given the government’s interest rate hikes over the past few months, which put many companies at risk of defaulting on payments, but “in this case, the major banks are hedging higher rates because they are bearing the risk,” he explained. The annual (stress) stress test shows.” Bank of America.
- Two weeks ago, the Fed said in its annual test of banks’ resilience that the largest U.S. lenders had enough safeguards to weather a deep recession while continuing to lend to households and businesses.
- The Fed’s stress tests have taken on greater importance this year after the collapse of three U.S. banks rocked the banking system.
- All 23 banks required to participate in the Fed’s tests are doing better this year than last year, despite being hit by a more painful worst-case scenario than last year.
- Like last year, the banks tested remained above the minimum capital requirement in the worst-case test scenario, but would lose a combined $541 billion. Capital ratios will fall by 2.3% to 10.1%, more than double the requirement.
- “Today’s results confirm that the banking system remains strong and resilient,” Michael Barr, the Fed’s vice chair for supervision, said in a statement.
Cassar believes that the benefits of high interest rates for major US banks outweigh the risks they face due to the “bad loan” bill, and pointed out that the crisis of regional banks in the spring is not serious. It is not about overall economic imbalances, but rather about problems caused by mismanagement and risk allocation.
The U.S. banking sector weathered a regional lender crisis this spring, but the results of the Federal Reserve’s stress tests show that the largest lenders could suffer billions of dollars in losses.
Unlike many small and medium-sized banks that used to pay higher savings rates to retain customers, large institutions are still offering relatively low rates to savers, boosting profit margins. However, analysts predict that eventually the big banks will have to start offering better rates.