Wall Street banks’ profits slide as economic clouds loom

Profits slid at Wall Street’s biggest banks in the third quarter as they braced for a weaker economy while investment banking was hit hard, but investors saw a silver lining with some banks beating estimates.

JPMorgan Chase & Co, Morgan Stanley, Citigroup Inc and Wells Fargo & Co’s showed a slide in net income after turbulent markets choked off investment banking activity and lenders set aside more rainy-day funds to cover losses from borrowers who fall behind on payments, reports Reuters.

“We’re in an environment where it’s kind of odd,” said JPMorgan Chief Executive Officer Jamie Dimon, who said that while the bank was “hoping for the best, we always remain vigilant and are prepared for bad outcomes.”

Central banks globally have been battling surging inflation which is expected to cause an economic slowdown. The Federal Reserve has raised the benchmark interest rate from near zero in March to the current range of 3.00 per cent to 3.25 per cent and signaled more increases.

Rising rates tend to buoy bank profits, but the broader risk of an economic downturn sparked by high inflation, supply-chain bottlenecks and the war in Ukraine could weigh on future earnings.

On a conference call, Dimon said US consumers remained strong and he wasn’t predicting a recession but “there are a lot of headwinds out there.”

Money that people have in their checking accounts will “deplete probably by sometime midyear next year” while they are contending with headwinds like inflation, higher rates and higher mortgage rates, he cautioned.

Banks set aside more money in preparation for a hit from a potential economic slowdown. JPMorgan set aside $808 million in reserves, Citi added $370 million to reserves and Wells had a $385 million increase in the allowance for credit losses.

Still, shares of JPMorgan and Wells Fargo gained strongly, up 2.5 per cent and 3.7 per cent respectively while Citi gained 1.2 per cent as the profit falls were not as deep as feared.