The United States’ eight globally systemically important banks have recently reported first quarter earnings that outperformed analysts’ forecasts. While the higher earnings are important for banks’ capital formation and liquidity, banks’ increase in provisions for future credit losses is a significant warning that earnings this year are in jeopardy. The volatility of stock, bond, and currency markets is helping the big banks with their profits, but the vast number of American banks, which do not have trading desks, will not receive a similar earnings boost.
Globally Systemically Important Banks in the U.S.
JPMorgan, Citibank, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo, Bank of New York, and State Street were designated by the Financial Stability Board, along with twenty-two other banks from around the world, as globally systemically important banks because of their asset size, interconnectedness to other similar global banks as well as corporations, and their complexity in size and transactions. Simply put, if any of these banks were to fail, the damage to the global economy would be significant. These eight banks represent almost half of the $24 trillion of US banking assets. Their financial health is critical to the American economy and of the rest of the world.
Big Bank Earnings Outperformed Forecasts
In the last week, the globally systemically banks posted record earnings. The current inflation environment means that banks continue to charge higher interest for loans and credit products such as credit cards, and they pay less interest to depositors. Moreover, banks’ healthy credit ratings means that when they borrow from each other, they are not paying high interest rates. However, if tariffs continue to push prices upward, companies and individuals will struggle to pay back their loans. At that point, banks’ net interest income will decrease.
For these eight banks, trading and investment banking make a much more significant part of their earnings than they represent for regional or certainly for community banks. The big banks with large trading desks such as JPMorgan, Citibank, Bank of America, Goldman Sachs, and Morgan Stanley profited significantly from stock, bond, and dollar volatility. When there is volatility banks trade more on behalf of their clients or to hedge their own portfolios; this helps them generate higher profits.
Yet, the same is not the case with investment banking; volatility makes companies less likely to hire investment banks for advisory services, bond and equity issuances, and mergers and acquisition transactions. For the moment banks performed well in investment banking, because the tariff chaos did not strike until April. JPMorgan’s investment banking revenues rose by 12%; nonetheless CEO Jamie Dimon pointed out that “clients have become more cautious amid an increase in market volatility driven by geopolitical and trade-related tensions.” Morgan Stanley’s and Goldman Sachs’ investment banking revenues grew by 8% and 10%, respectively, from the same period in 2024. Even before the tariff turmoil at the beginning of April, however, Bank of America’s investment banking revenues decreased 3% to $1.5 billion, less than the $1.6 billion consensus forecast.
Banks Provision for Credit Losses
While the big banks performed extraordinarily well with tariff-induced market volatility, their credit portfolios will not benefit from elevated levels of economic and market uncertainty. In the first quarter of 2025, big banks all allocated significant provisions for credit losses, because executives and their boards are concerned about how the tariff uncertainty will impact the economy and hence their earnings in the coming months. These eight banks have different business models but given that they represent about half of U.S. banking assets, these are the key ones to monitor.
- Morgan Stanley raised its provisions for credit losses to $135 million, a dramatic increase in comparison to a release of $6 million in provisions in the first quarter of 2024.
- Citibank raised its provisions for credit losses by 326% to $264 million from $62 million in the first quarter of 2024. According to Citibank’s earnings presentation, Allowance for Credit Losses (ACL) Build (Release) and Other provisions includes a net ACL build of approximately $210 million related to loans and unfunded lending commitments as well as other provisions of approximately $54 million relating to held-to-maturity (HTM) debt securities and other assets and policyholder benefits and claims.
- JPMorgan raised its provisions for credit losses to $27.6 billion, a 13% increase in comparison to the same period in 2024.
- Wells Fargo’s provisions for credit losses of $932 million are slightly less than the same period in 2024.
- Bank of America provisioned $1.5 billion for credit losses, a 7% increase from the same period in 2024.
- Goldman Sachs provisioned $287 million primarily for potential credit losses in its credit card portfolio; this provision represents a 10% decline from the same period in 2024.
- Bank of New York provisioned $18 million for credit losses, a significant 33% lower in comparison to the same period.
- State Street’s provisions were $12 million in primarily reflecting an increase in loan loss reserves associated with certain commercial real estate loans. However, these provisions are over 50% lower than they were in the same period in 2024.
Economic and Market Signs to Keep Watching
Despite banks’ strong earnings, bank indices show that investors have not returned to investing in banking stocks. In the last 30 days, the S&P Banks Select Industry Index has declined 11%. This index is important for bank investors and analysts to monitor given its comprehensive nature. The index includes “Asset Management & Custody Banks, Diversified Banks, Regional Banks, Diversified Financial Services and Commercial & Residential Mortgage Finance sub-industries.”
Unfortunately for banks’ financial health, signs continue to point to a slowdown in the economy. Relevant stakeholders have all taken notice. FitchRatings, for example, revised its expectations for GDP growth downward. Fitch analysts explained that “the latest U.S. tariff announcements and retaliations have prompted a special update to lower U.S. and global growth forecasts. U.S. annual growth is expected to slow to 0.4% in 4Q25. Policy uncertainty and disrupted U.S.-China trade flows will weigh on business sentiment. Tariffs and other policy changes have broad credit implications, potentially leading to negative ratings trends. Sectors like autos, technology hardware, and homebuilding are most affected by tariffs. Higher inflation and interest rates will challenge economic growth and increase recession risks. Funding and liquidity conditions deteriorated sharply following the April 2 tariff announcement, impacting corporate bond issuance and bank lending growth.”
According to FitchRatings, “risks to corporate revenue and margin expectations are skewed to the downside. The autos, technology hardware, and homebuilding sectors are most negatively affected by tariffs, while technology and gaming sectors appear vulnerable to retaliation by trade partners. Potential Medicaid cuts will have materially negative credit implications for healthcare credits.” Tariffs are adversely affecting every sector of the economy, and banks will need to be monitoring the probability of default for all the companies to which they lend or with which they transact financial derivatives. Certainly, investors in banks’ bonds and equities will also have their eyes on how banks navigate the tariff turmoil.
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