Wall Street banks cautious on inflation and the economy

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A woman wears a mask near the New York Stock Exchange (NYSE) in the financial district of New York, U.S., March 4, 2020. REUTERS/Brendan McDermid/File Photo

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NEW YORK, Feb 17 (Reuters) – Wall Street’s biggest banks on Thursday issued a note of caution over the year ahead, citing high inflation, credit problems and the possibility of weaker stock appreciation. assets, although investment banking pipelines and loan growth remain strong.

Banks reported mixed results last month with some disappointments as trading revenue fell in the fourth quarter after markets normalized and the Federal Reserve scaled back asset purchases. They are now grappling with high inflation and a Federal Reserve looking to raise rates more aggressively. Read more

Several senior executives provided updates on market conditions at the Credit Suisse Financial Services Forum in Florida, about a month after announcing their fourth quarter results.

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“We are moving from an environment of very easy money and below-trend inflation to an environment of monetary tightening and above-trend inflation. The economic environment is different and there will be consequences to that” , said Goldman Sachs CEO David Solomon.

High inflation is worrisome enough that Bank of America chief executive Brian Moynihan said his bank had stress-tested its portfolio to determine the possibility that Fed policymakers might not be able to control inflation and the economy goes into recession.

“We have to run those scenarios,” Moynihan said. “What will hurt the industry in general will be if they have to create a recession. And that’s not their goal for sure. They will hopefully do a great job of managing it. We’re testing that and we’re fine.”

Mike Santomassimo, chief financial officer of Wells Fargo & Co, the fourth-largest U.S. bank, noted that credit spreads have widened and “this is an area to watch to see if there are any cracks that are starting to crack.” emerge”.

“Inflation is likely to be a real headwind for growth. That’s one of the uncertainties,” Solomon said. “Nobody really knows how we’re going to navigate from a monetary policy perspective to rebalance inflation. It’s an unknown.”

High inflation and expectations of more aggressive Fed rate hikes have rattled markets this year, sending the S&P 500 (.SPX) down 7% year-to-date, while yields bonds jumped and the yield curve flattened.

Shares of Goldman, Bank of America and Wells Fargo all fell more than 2%, underperforming the broader market on Thursday. The S&P 500 (.SPX) was down 1.3% by mid-morning.

Solomon said that “everyone is used to asset appreciation and we may have a period of time when there is less asset appreciation.”

Trading activity was not as high as in 2021 but was “still quite active” while M&A activity was “pretty high” so far, he said. Still, there would be fewer equity issues this year, he added.

Bank of America’s Moynihan struck a similar tone when he said the bank’s capital markets business “is down” so far in 2022, even as the investment bank continues to see a strong customer activity pipeline. Read more

Wells’ Santomassimo noted that while the consumer and real estate portfolio essentially continues to perform, “in the automotive space, which is a fairly small portfolio in the balance sheet pattern, at the bottom of the automotive book , maybe you see a little noise there.”

However, he said the rate hike would help the bank’s ultimate goal of achieving a 15% return on tangible equity. When interest rates are higher, banks make more money by taking advantage of the difference between the interest banks pay customers and the interest they can earn by investing.

“The question will be where the rates go and then what impact that has on the economy and the environment that we find ourselves in,” Santomassimo said.

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Reporting by Matt Scuffham, Elizabeth Dilts Marshall in New York and Noor Zainab Hussain in Bengaluru; Written by Megan Davies; Editing by Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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