Bank CEOs increasingly turning pessimistic on economy

NEW YORK (AP) — The outlook for the U.S. economy from Wall Street's biggest banks is getting gloomier, with many top executives saying they're preparing for a potential downturn or a recession.

Following the short but potent pandemic recession in 2020, many bank CEOs have spent the past year and a half trumpeting the strength of the U.S. economy and the resilience of the U.S. consumer. Many did so again Friday after reporting their quarterly results, but this time with an overriding sense of caution.

"We recognize the pressure points are building in several areas of the economy that could lead to stress in the future," said Andy Cecere, CEO of U.S. Bank.

Such comments reflect the growing evidence that the U.S. and global economy is weakening in the face of worldwide inflation and the war in Ukraine. On Tuesday, the International Monetary Fund lowered its forecast for 2023 global economic growth to 2.7% from 2.9%.

Half a dozen banks reported their quarterly results on Friday, ranging from behemoths JPMorgan Chase and Citigroup to super regional banks like U.S. Bank and PNC Financial. In calls with journalists and investors, bank executives painted a bifurcated picture of the economy.

On one hand, they noted a low level of delinquencies, solid consumer spending and healthy activity among their business clients. At the same time, they acknowledged multi-decade high levels of inflation, a housing market that is slowing down quickly, and a Federal Reserve that is raising rates at an unprecedented pace, which will make it more difficult for businesses to borrow.

"Inflation is casting a long shadow on these banks' future outlooks," said Peter Torrente, U.S. national sector leader for banking and capital markets at accounting giant KPMG

Inflation has been persistently high for months, with this week's reading of consumer prices showing an 8.2% rise in costs in September from a year earlier. Fed officials have pushed up their short-term rate by a hefty three-quarters of a percentage point three times in a row, bringing it to a range of 3% to 3.25%, the highest in 14 years. Wall Street is expecting another 0.75 percentage point hike in November.

Reflecting the dimmer macroeconomic view, Citigroup, Wells Fargo and JPMorgan socked away cash in their loan-loss reserves. These reserves are set aside to cover potentially bad loans. During the pandemic, banks put tens of billions of dollars into these reserves but had released the bulk of those funds in 2021 reflecting the improvement in the economy.

Now the banks are again fortifying the reserves. JPMorgan set aside roughly a $1 billion in its loan loss reserves, while Citigroup and Wells both roughly put $400 million into their reserves this quarter. The pace of additions is slower than at the onset of pandemic when, for example, JPMorgan put more than $10 billion into its reserves in one quarter.

The goal of the Fed's rate increases is to slow the economy and bring down inflation. The possibility of going too far and causing a recession is a big concern for economists, Wall Street analysts and bank executives.

Wells Fargo CEO Charlie Scharf told investors on a conference call that the bank expects broader economic conditions to weaken, resulting in increases in delinquencies and credit losses.

Cecere, the U.S. Bank CEO, said, "While the backdrop is favorable today, it would not be surprising to us to see an economic slowdown develop at some point driven by lower confidence levels, which may lead to reduced spending and business investment."

JPMorgan Chase CEO Jamie Dimon made headlines Monday when he said a "very, very serious" mix of concerns could lead to a recession in the next six to nine months.

On Friday, Dimon talked up the fact U.S. consumer health remains strong. Investors pushed to get clarity.

"I'm trying to reconcile your comments before and now," Mike Mayo, an analyst with Wells Fargo Securities, said to Dimon.

In response, Dimon described the current economic environment as "odd." reflecting the fact delinquencies are low and consumer spending remains strong despite the inflationary headwinds. But he predicted that the extra savings U.S. households socked away during the pandemic would likely be exhausted by mid 2023, if inflation is not brought under control.

One thing supporting Dimon's comments is the amount of spending consumers are doing with their credit cards. Wells Fargo, Citigroup and JPMorgan all reported double-digit increases in consumer credit card spending compared to a year earlier.

While JPMorgan executives said that some of that spending might be consumers returning to pre-pandemic spending trends, inflation might simply be stretching household budgets.