Big banks are wary of loan losses amid war in Ukraine and inflationary pressures

The country’s largest banks showed signs of concern about the state of the economy next year, with inflation and geopolitical risks behind a rise in expected loan losses.

On Wednesday, JPMorgan Chase’s (JPM) first-quarter results showed the largest American bank increased its buffers — for missed lease and loan payments — for the first time since late 2020.

Jamie Dimon, CEO of JPMorgan Chase, told analysts on Wednesday that economic activity is showing strong growth and an “extraordinarily good” credit rating at the moment.

“This will continue in the second quarter, in the third quarter. After that, it’s hard to predict,” Dimon said on his company’s earnings call.

The company added over $800 million to its loan loss allowance in the first three months of the year due to “high inflation and the war in Ukraine.”

In the early months of the pandemic, banks dramatically increased their allowances as the economic shutdown raised concerns about the ability of households and businesses to repay business loans, mortgages, credit cards and other banking products.

The recovery has released the banks from these reserves, which has also provided a positive boost to earnings.

“Unpredictable to say the least”

JPMorgan Chase’s turnaround underscores concerns that recession risks are looming.

However, other large banks reporting this week continued to deduct their allowance for loan losses. Wells Fargo (WFC) and Citigroup (C) both reported Thursday and each withdrew about $1 billion in allowances.

JPMorgan Chase increased its allowance for loan losses in the first quarter of 2022, while Citigroup and Wells Fargo did not. Source: corporate earnings

Citigroup management said it was able to release reserves because the company has been slower than other banks to lower its COVID-related buffers in its US retail business over the past year. But the company is still putting enough aside to address its involvement in the Russian economy.

“My expectation is that, against the backdrop of war, the macroeconomic environment will remain unpredictable, to say the least,” Citigroup CEO Jane Fraser said on Thursday’s earnings call.

At more domestically-focused Wells Fargo, CFO Mike Santomassimo said an easing of COVID-related concerns in the first quarter gave management confidence to further reduce its buffers. Still, an uncertain economic backdrop — as inflation weighs on America’s pockets — raises the possibility that net write-offs (a measure of debt deemed uncollectible) will soon rise.

“We expect that they will eventually rise to more normal levels as the economic environment continues to develop,” Santomassimo said while speaking to reporters Thursday morning.

Year-to-date, the big bank stocks have far outperformed the S&P 500 (with the exception of Wells Fargo). Banking analysts are noting that the shift in sentiment is causing financials to trade at a discount, but not without risk.

“Overall, if you’re an investor and you think we’re going into a recession, stocks don’t do very well in this environment. Financial stocks could also have a hiccup here,” Devin Ryan, director of financial technology research at JMP Securities, told Yahoo Finance on Thursday.

Bank of America (BAC), the last of the Big Four banks yet to report, is expected to release earnings results on Monday.

Brian Cheung is a reporter covering the Fed, the economy and banks for Yahoo Finance. You can follow him on Twitter @bcheungz.

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