Yellen: US banks could become ‘more cautious’

US Treasury Secretary Janet Yellen arrives for dinner with Latin American and Caribbean finance ministers at the US Treasury Department in Washington, DC, April 13, 2023.  PHOTO AFP

US Treasury Secretary Janet Yellen arrives for dinner with Latin American and Caribbean finance ministers at the US Treasury Department in Washington, DC, April 13, 2023. PHOTO AFP

US banks may become more prudent in lending following the recent unrest in the sector, the country’s finance minister said in an interview due to air on Sunday US time, while still predicting “moderate” economic growth.

Last month, the financial sector was rocked by the dramatic collapse of California-based lender Silicon Valley Bank (SVB). The fall of SVB was soon followed by the collapse of another US regional lender and a pressured merger between Swiss investment banking giant Credit Suisse and its regional rival UBS.

It is likely that banks will be “somewhat more cautious” in their operations, including lending to individuals and businesses, Janet Yellen said in an interview with CNN, excerpts from which were published on Saturday.

This could lead to limited access to credit, which, combined with higher rates, could affect economic activity and could also help slow inflation.

However, at a press conference on Tuesday last week, Yellen indicated that she “hasn’t really seen evidence at this stage suggesting a credit cut.”

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Yellen told CNN that despite the turmoil in the banking sector, her outlook for the US economy remained the same: “I think the outlook is still around moderate growth and a continued strong labor market with inflation falling.”

“At the moment, I don’t see anything dramatic or significant enough, in my opinion, to significantly change the worldview,” she said.

Big profit

In this regard, major US banks reported higher profits last week, despite the recent turmoil in the industry.

JPMorgan Chase announced a jump in first-quarter earnings on Friday, along with fellow banking giants Citigroup and Wells Fargo, reassuring investors with the news after recent banking turmoil sparked contagion fears.

The first significant look at the sector – after the collapse of the SVB and two other mid-sized banks last month – showed that the big banks still benefit to some extent from the Federal Reserve’s move to higher interest rates and from the still-healthy American consumer.

But JPMorgan’s results came in better than expected as it again warned of a potential economic downturn by adding $1.1 billion in bad loan reserves.

Both Citigroup and Wells Fargo also added provisions in light of the uncertainty, with the latter pointing to commercial real estate, which many see as a vulnerable area of ​​finance.

Friday’s results boosted JPMorgan and Citi stocks significantly, but several mid-sized banks tumbled. Those banks, including First Republic, Zions Bancorporation and Comerica, which are considered more at risk, are due to report results later this month.

JPMorgan, the largest U.S. lender by assets, posted a 52 percent rise in earnings to $12.6 billion. This was helped by record revenues of $38.3 billion, up 25% from last year.

But the additional reserves were taken due to “a worsening weighted-average economic outlook” and “an increased likelihood of a moderate recession due to tighter financial conditions,” the bank said in a statement.

Chief Executive Jamie Dimon, speaking on a conference call with reporters, said US consumers remain “pretty healthy” but the economy is facing challenges. These include lingering inflation, tightening of the Fed’s policy, and the aftermath of the war in Ukraine.

“We will eventually have a recession, but it can be delayed a little,” Dimon said.

JPMorgan’s results were underpinned by much higher net interest income (NII) as a major US bank benefited from higher interest rates, allowing it to charge higher fees for loans.

He reported a decrease in deposits compared to the period last year, but an increase compared to the previous quarter. In fact, JPMorgan has dramatically increased its 2023 NII forecast to $81 billion, up $7 billion from the previous forecast.

CFO Jeremy Barnum said the outlook partly reflects expectations about the Fed’s policy, including talk of an interest rate cut later this year that has removed “a little pressure” on banks to raise interest rates for savers.

Dimon said the U.S. economy remains “generally healthy” but banking turmoil added to economic headwinds.

“Banking is different from 2008 as there were far fewer financial players involved and fewer issues to address, but financial conditions are likely to tighten as lenders become more conservative and we don’t know if this will slow down consumer spending.” “, He said.

Meanwhile, Citigroup reported a profit of $4.6 billion, up seven percent from last year, on a 12 percent rise in revenue to $21.4 billion.