US bank profits could be hurt by asset volatility related to Russia

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Signs from JP Morgan Chase Bank, Citibank and Wells Fargo & Co Bank can be seen in this combination photo from Reuters files. REUTERS

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NEW YORK, March 23 (Reuters) – Fluctuations in asset prices following Russia’s invasion of Ukraine could hurt big US banks’ first-quarter profits depending on what happens before the end of the month and how markets react, analysts said.

Trading losses, provisions for expected credit losses, asset write-downs and business closure fees could cloud what was expected to be a good quarter as banks benefited from higher interest rates and more lending even as the tide of investment banking earnings eased.

Big banks could face one-off losses totaling $5 billion, or twice that, or none at all, said RBC Capital Markets analyst Gerard Cassidy.

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“You really can’t say that because the markets are so volatile depending on what’s going on with the geopolitical risks,” he said.

Market volatility has been a bad thing for traders, as prices have been bouncing rather than moving steadily, as can happen when interest rates are expected to rise or fall, analysts say.

“The next two weeks could make or break near-term results,” wrote Barclays analyst Jason Goldberg on Friday.

Major US banks begin earnings reporting on April 13th.

Goldberg cited comments from JPMorgan Chase & Co (JPM.N) markets chief on March 8 that quarterly earnings had become unpredictable due to “significant counterparty risk” and “many customers” experiencing extreme stress, particularly from commodities trading.

These risks were identified on Friday by rating agency Standard & Poor’s in a report on the potential impact of the conflict. S&P also warned of new operational sanctions compliance issues and increased cyber risk.

So far, Citigroup Inc (CN) is the most likely to stand out to report a significant hit. Aside from market exposures, his consumer bank in Russia could be a source of losses.

CITI BUYBACK PLANS UNDER THREAT

Citigroup said on March 2 that in a “severe stress scenario” it could face nearly $5 billion in losses from its Russian operations. Continue reading

The bank has enough excess capital to handle this without serious damage, analysts said. But a hit could slow share buybacks — a key part of Chief Executive Jane Fraser’s plan to raise the bank’s valuation.

Citigroup shares trade for less than the company’s net worth, and a buyback would add value.

The fallout from the Russian invasion of Ukraine, which Moscow calls a “military special operation,” and the resulting sanctions have intensified since the bank first announced possible losses.

Whether events point to a hit of $2 billion or $4 billion for Citigroup in the first quarter, or some other total for the year is impossible to determine, analysts said.

“The difficult part for us at Citi right now — and probably for them too — is how much depreciation has to be,” Cassidy said. “Write-downs are coming. We just don’t know how hard yet.”

According to data from Refinitiv I/B/E/S, analysts expected Citi to make $13.7 billion this year, so even with a $5 billion charge, Citigroup should still be profitable this year.

Few analysts have updated their estimates for Citigroup since March 4. Many may withhold estimates for the big banks until the end of the quarter. Continue reading

By then, markets may have turned and more banks may have disclosed the fallout from the war and sanctions.

Bank of New York Mellon Corp (BK.N) said Thursday that pulling out of Russia would cost it $100 million in lost revenue in the first quarter. Depending on final accounting, this could reduce earnings by 10% from current estimates, according to Barclays’ Goldberg. Continue reading

Some analysts declined to be quoted about changes they plan to make to their estimates for the first quarter. “We need to put a number in for the regulations,” said one.

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Reporting by David Henry in New York; Edited by Matt Scuffham and Matthew Lewis

Our standards: The Thomson Reuters Trust Principles.

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