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Home / Industry / Banking /  What to watch in bank earnings, from interest rates to Omicron’s impact

As the pandemic drags on, what does the new normal for banks look like? Investors are about to get some answers.

Big U.S. banks unveil fourth-quarter results starting later this week, with JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. slated to report Friday.

Banks in the S&P 500 are expected to report total profits of about $31.2 billion for the fourth quarter, according to FactSet. That would mark a 2.4% decline from a year earlier.

Like other businesses, banks are being forced to adapt to the Omicron economy. Consumer spending flagged toward the end of the year as the Covid-19 variant emerged. Inflation hit a four-decade high in December.

Spending with Chase credit and debit cards weakened from 21% above 2019 levels in November to 11% above in the last week of December, according to analysts at JPMorgan Chase. The decline in spending on airfare was especially sharp, they said in a research note.

Adding to the pressure: Banks built up reserves in 2020 when they were expecting big pandemic loan losses. That hit their profits hard. When the economy improved, banks started releasing those reserves, giving their bottom lines a boost. Those reserve releases are expected to be much smaller going forward.

Meanwhile, historically high trading revenue, a crucial source of profits during pandemic-induced market volatility, is returning to more normal levels. Wall Street analysts expect Goldman Sachs Group Inc. to report about $4.2 billion in trading revenue for the quarter, according to FactSet. That would still be up about 20% from the fourth quarter of 2019, but down about 45% from the first quarter of 2021.

Yet Wall Street is expecting bright spots as well. Rising U.S. government bond yields could lead to higher lending profits. KBW analysts expect adjusted net interest income to rise 8% in the fourth quarter from a year earlier.

That growth might continue in 2022, which is enticing investors. The KBW Nasdaq Bank Index has rallied more than 10% since Dec. 15, when the Federal Reserve signaled it would raise interest rates several times in 2022. JPMorgan Chief Executive Jamie Dimon predicted more than four increases this year in a CNBC interview Monday. The Fed signaled last week that it could raise interest rates as soon as March.

Loan growth is starting to tick higher after a lull through much of the pandemic. Total loans at U.S. banks reached $10.76 trillion at the end of December. That is up 2.8% from the end of September and not far from the high reached shortly after the pandemic began in 2020.

One major source of banking profits, a white-hot market for deals, shows little sign of slowing. Global investment-banking revenue topped $31 billion in the fourth quarter, according to Dealogic. That is down slightly from earlier quarters in 2021, but well above pre-pandemic levels.

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