US Banking Giants Brace For Fourth-Quarter Earnings Amid Mounting Bad Debts, Interest Rate Pressure

As the U.S.’s prominent banking institutions prepare to report their fourth-quarter earnings, a significant surge in bad debts poses a risk to the growing investor confidence in the sector.

What Happened: The Financial Times reported on Monday that non-performing loans at the four largest U.S. banks are estimated to have ballooned to a combined $24.4 billion in the last quarter of 2023, an increase of nearly $6 billion from the end of 2022.

Analysts are projecting a decline in bank earnings for the last quarter of 2023, partly influenced by these unpaid loans and the lingering effects of higher interest rates, which have driven up deposit costs.

Additionally, several big banks are expected to incur a one-time charge by the end of the year, as they have agreed to a special assessment imposed by the Federal Deposit Insurance Corporation to recoup the $18.5 billion that last year’s failures of Silicon Valley Bank and Signature cost the regulator’s insurance fund.

See Also: US Economy Set For ‘Soft Landing’ As Economists Eye Fed Rate Cuts

The banks, including JPMorgan Chase & Co. JPM, Bank of America Corp BAC, Wells Fargo & Co WFC, and Citigroup Inc. C, are all expected to disclose their results on Jan. 12.

Why It Matters: The anticipated earnings drop comes amid a period of significant market turbulence, with renewed concerns about the Federal Reserve’s policies contributing to the S&P 500’s first decline in 10 weeks, as reported by Benzinga on January 7. This has led to a challenging beginning to the year for the Treasury bonds and corporate credit markets.

Despite the expected earnings fall, investors have been buying up bank shares, with shares rising by 20% since the end of October, as per the KBW Nasdaq Bank index. This surge is underpinned by the Federal Reserve’s indication late last year that it has likely concluded raising interest rates, easing the pressure on interest rates.

“Banks are very interest rate-driven,” said Matt Anderson, a banking industry analyst at commercial property research group Trepp.

“And investors have an optimistic read on the economy in 2024.”

Despite easing interest rate pressures, a potential increase in unpaid loans could continue to hamper bank profits.

Read Next: Bitcoin ETF Approval, ‘Dogecoin Killer' Shiba Inu's Surging Burn Rate And More: Weekly Crypto Round-Up

Photo via Shutterstock