Financial Markets Plunge Amid Russia-Ukraine War... US Six Major Banks Expected to See 35% Profit Decline

[Asia Economy New York=Special Correspondent Joselgina] After recording record-high earnings last year, major Wall Street investment banks in the United States were met with a cold shower as the bonus party ended. The net profits of major banks for the first quarter, to be released this week, are expected to plunge by more than 35% compared to a year ago. This is due to the increased market uncertainty caused by Russia's invasion of Ukraine, which has led to a noticeable decline in investment activities such as initial public offerings (IPO) and mergers and acquisitions (M&A).

◇ US Banks Opening Earnings Season, Bleak First Quarter

According to the US financial sector, starting with JP Morgan Chase, the largest US bank, which will kick off the first-quarter earnings season on the 13th (local time), Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo will report their quarterly results on the 14th, and Bank of America (BoA) on the 18th.

According to an analysis by market research firm Refinitiv I/B/E/S, the net profits of these six major banks are estimated to decrease by about 35% year-on-year in the first quarter. Christopher McGrath, an analyst at Manhattan-based investment bank Keefe, Bruyette & Woods, said, "The first quarter will be challenging for large banks," adding, "The biggest headwinds are a 36% decline in investment banking (IB) and an 18% drop in trading revenue."

Economic media CNBC estimated that while the earnings of S&P 500 companies in the first quarter of this year are expected to increase by 6.1% compared to the previous year, the financial sector is estimated to have declined by 22.9%. In particular, the larger the major banks that recorded strong earnings last year, the more pronounced this decline is expected to be. Bloomberg predicted that investment banking fees for the top five major banks would have decreased by an average of 26%.

◇ Russian War... Capital Markets Also 'Frozen'

These results are largely due to the investment market freezing up following Russia's recent invasion of Ukraine. The volume of public offerings in the first quarter recorded the lowest level since 2016. This contrasts with the first quarter of 2021, a year ago, when a boom in public offerings centered on special purpose acquisition companies (SPACs) led to a fee bonanza on Wall Street. Losses in highly volatile product markets are also continuing. Additionally, the issue of reversals of loan loss provisions made during the COVID-19 pandemic has disappeared.

In particular, as the Ukraine crisis shows signs of prolonging, the tension among Wall Street investment banks is rising further. JP Morgan Chase CEO Jamie Dimon recently revealed in a shareholder letter that losses related to the Ukraine crisis could reach $1 billion. Citigroup's exposure to Russia is estimated to be about $10 billion. Earlier, Citigroup warned that in the worst case, it could lose nearly half of that amount, between $4 billion and $4.5 billion.

Previously, securities firms have also lowered earnings forecasts for major banks. Jeffrey Hart, an analyst at Piper Sandler, said, "This reflects headwinds related to capital market revenues amid increased macroeconomic uncertainty and market volatility," lowering target stock prices and revising net profit estimates downward for these major banks.

◇ "28% Chance of US Recession Within One Year"

Morgan Stanley, in an investor note, stated, "Banks are facing tailwinds such as upcoming interest rate hikes, but risks from the (Ukraine) war have clearly increased," adding, "The Federal Reserve's acceleration of monetary tightening to curb soaring inflation, which raises the possibility of an economic slowdown, is also included among the risk factors."

According to a survey conducted by The Wall Street Journal on 65 economists, the probability of the US economy entering a recession within the next year reached 28%. This is a 10 percentage point increase compared to the survey conducted in January.

This content was produced with the assistance of AI translation services.