Capital One, Discover, Chase Earnings Hold Mirror To American Economy:

Capital One Financial Corp COF is slated to issue its second-quarter earnings report on Thursday after the market closes.

Investors will use Capital One's earnings print as a way to gauge the health of the U.S. consumer economy, using indicators like the provision for credit losses and net charge-offs.

Earnings Expectations By The Numbers: Analysts expect Capital One to issue earnings of $3.22 per share on revenues of $9.12 billion. Last quarter, the bank allocated $2.795 billion for credit losses, marking a surge of nearly $300 million from the fourth quarter of 2022.

Net charge-offs for last quarter stood at $1.697 billion, up 2.21% over the fourth quarter of 2022.

What Other Players Are Indicating: To gauge what might be in store for Capital One after the close, it’s worth exploring recent earnings of other large financial institutions.

Wells Fargo & Co WFC, which issued earnings last week, disclosed a provision for credit losses of $1.7 billion, with total net loan charge-offs of $764 million — a rise of $420 million.

The bank increased its allowance for credit losses to $14.8 billion, up $1.9 billion.

JPMorgan Chase & Co JPM reported $2.899 billion in provisions for credit losses, a bump from the $2.275 billion seen in the first quarter.

The bank’s net charge-offs surged by $754 million, to $1.4 billion, largely driven by Card Services.

PNC Financial Services Group Inc PNC, which reported on Tuesday, marked a provision for credit losses of $146 million in the second quarter of 2023. PNC's shift reflects portfolio activity and adjustments in macroeconomic variables.

Meanwhile, the bank’s net loan charge-offs stood stable at $194 million in the second quarter of 2023 compared to the first quarter. Yet there was a noticeable rise of $111 million from the second quarter of 2022, driven by elevated commercial and consumer net loan charge-offs.

Discover Financial Services DFS, another player, said its provision for credit losses soared to $1.3 billion, up by $756 million from the prior year. Discover said the surge was driven by an additional $263-million reserve build in the current quarter and a $495-million increase in net-charge offs.

Morgan Stanley MS reported provisions for credit losses at $161 billion, a significant increase over the $101 billion seen in the same quarter of the previous year. Morgan Stanley said the increase was primarily due to deteriorating credit conditions in the commercial real estate sector, in addition to modest portfolio growth.

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The Underlying Thread, Commercial Real Estate: Commercial real estate, or CRE, is proving to be a recurring theme across the board, as most of the banks above said they've set aside capital for CRE loans.

The trend underscores the growing strain on this sector, particularly in office buildings, due to high interest rates and remote work.

Despite the CRE challenges, all banks are seeing significant upticks in net interest income, suggesting they are still feeling the tailwinds of the Federal Reserve's latest interest rate hike campaign.

Benzinga's Take: Drawing from the uptick in net charge-offs observed across major banks, there’s an indication of increasing stress in the U.S. consumer economy.

In essence, net charge-offs represent debts the above institutions believe are unlikely to be recovered, suggesting that more consumers are defaulting or falling behind on their credit obligations.

The trend is likely driven by inflationary pressures and still-high housing and rental costs.

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