Banks Raise Loan Loss Provisions: BofA Sees No Recession But is Prepared for One

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JPMorgan, BofA post record results on the back of retail divisions. BofA says it is prepared if a recession hits.

Interest rates have gone up for those seeking loans. Bank profits are up because interest rates have not gone up as much for depositors.

Please consider Big Banks Lean on Main Street for Profit Before Fed's Pause Hits.

The Fed’s four interest-rate increases last year and a relatively buoyant U.S. economy have boosted what banks can charge for loans, with the average rate the firms earned rising almost 0.5 percentage points in the past year. They’ve also so far been able to limit how much of the hikes they’ve passed on to depositors.

At Bank of America, the consumer unit’s net interest income climbed 10 percent, helping propel the bank to record quarterly earnings.

Bank of America said net interest income growth will slow over the rest of this year, while Wells Fargo & Co. went even further and predicted a decline. And three of the four largest lenders increased provisions to cover consumer loan losses, with Wells Fargo more than tripling the amount it set aside.

“Just for the record, I want to be very clear -- we don’t see any evidence of a recession,” Bank of America CFO Paul Donofrio said on a call with reporters Tuesday. “In any event, if a recession were to come, we are very well prepared.”

For now, the Fed’s March reversal and a flat -- and at times inverted -- yield curve is the more pressing concern. Wells Fargo said net interest income could fall as much as 5 percent this year, while Bank of America sees it growing at half of 2018’s pace.

Still, JPMorgan, which stuck with its outlook for net interest income to climb to more than $58 billion in 2019, sees a silver lining in the Fed’s pause: less pressure to raise rates for its $1.5 trillion deposit base.

Prepared for Recession?

Banks always say they are prepared for recession but history shows they aren't as soon as recession hits.

That said, US banks are far better prepared than their European counterparts.

ECB vs the Fed

The ECB made a huge mistake with negative interest rates whereas the Fed bailed out US banks slowly over time by paying interest on excess reserves.

Negative interest rates (charging banks instead or paying them) harmed already crippled European banks.

Mike "Mish" Shedlock

Comments (10)
No. 1-5
Realist
Realist

And Canadian banks are better prepared than US banks. That’s why they have been one of my favourite investments for several decades now. As I have mentioned to Mish before; he should move to Ontario when he finally leaves Illinois. I might move there too at some point.

Runner Dan
Runner Dan

Let’s complete the following sentence.

“…the Fed bailed out US banks slowly over time by paying interest on excess reserves AND suspending mark-to-market accounting AND purchasing nearly $2 trillion mortgage backed securities AND easily convincing government to start the Home Affordable Refinance Program AND increasing the conforming loan limits AND the Emergency Economic Stabilization Act AND the Troubled Asset Relief Program AND…” I am running out of breath here.

mark0f0
mark0f0

@Realist how so? They (Canadian banks) actually reduced loan loss provisions for 2018 vs 2017, the reversal of such was responsible for much of their profit growth last year. Which means that they're running with particularly low loan loss provisions in 2019. Into a probable Canadian recession including significant losses in RE and consumer-consumption loans.

Realist
Realist

People have said the same thing many times before, yet the Canadian banks barely break stride in the face of such dire warnings. The Canadian banks were also supposed to get hit hard by large losses on loans to the energy sector over the last three years. Didn’t happen. I always look forward to when the worry warts cause the share prices to drop 10-20% because it allows me to buy more at a sale price. Like in December. Most bank shares are up significantly since then.

Mish
Mish

Editor

Excellent cooment by Runner Dan