Banks' Revenue Bonanza Seen Under Threat From Looming US Recession

The market volatility and interest-rate hikes that gave US banks their biggest windfall last year may prove to be their biggest headache in 2023.

When Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. kick off the industry’s fourth-quarter earnings on Friday, investors will be less interested in seeing how robust profits were in the final three months of last year and more focused on signs the nation’s biggest banks are girding for a major downturn as rate increases crimp economic activity.

“We are entering a period of uncertainty from a period of strength,” Jason Goldberg, an analyst at Barclays Plc, said in an interview. “Despite the fact we are potentially looking at a recession in the face, loan losses are at record lows, trading remains elevated, and net interest income will set records at the banks,” he said. “Yet everyone is scared of their shadow.”

The quarterly results will probably get a boost from strong fixed-income trading and record net interest income, tempered by more provisions for bad debt, a slump in underwriting and fewer mergers and acquisitions. Those headwinds could get worse if the economy weakens and geopolitical tensions continue.

Here’s what to watch when banks start to report results later this week: