Happy Wednesday!

📝 Focus

• Leaping Loan Losses!

📊 In the Markets

• US in “The Last Part”

• UK in a Spiral?

📖 MoneyFitt Explains

🎓️ Interest Rate Trade-off for Banks

📝 Focus

Leaping Loan Losses!

Big US banks will kick off the earnings season this week… and are expected to report a huge jump in loan losses as the cost of rising interest rates puts pressure on borrowers. Banks have benefited the last few years from higher lending rates and deposit rates that have risen by less, and also from investment income.

.....▷ Banks have had three years of relatively low defaults, partly helped by pandemic-era stimmy cheques and other government assistance. But they are now starting to experience the inevitable trade-off🎓, with the negative effects of higher rates on borrowers kicking in through bad debts as well as "provisions" against potentially bad loans that the banks made. Credit cards and commercial real estate loans are among the biggest areas of pain for banks. The slowdown in investment banking deal-making and trading revenue is also likely to hit earnings.

.....▷ The six largest US banks, including JPMorgan Chase, Bank of America, Wells Fargo and Citigroup, are estimated to have written off $5bn of defaulted loans in Q2, with an additional $7.6bn in provisions. For now, the positives of sharply higher interest rates seem to outweigh the negatives for most of the big banks.

.....▷ Loan losses are a normal and expected part of lending and of the economic, business and banking cycle. Prudent banks will set aside provisions in the good times (including when loans are made) ahead of the inevitable downturn later in the cycle.