Oct 11 (Reuters) – The six largest U.S. banks are expected to set aside nearly $5 billion in the third quarter to cover future loan losses, Wall Street analysts said, as lenders brace for a possible global recession.

Big bank profits rose last year as they freed up funds earmarked for potential COVID losses. In the third quarter of last year, they released about $4 billion in loan provisions, according to Refinitiv data.

But with fears of a recession growing as the U.S. Federal Reserve aggressively raises interest rates to curb inflation, the buildup of reserves in the third quarter could be the biggest drag on bank profits, analysts said.

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JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon warned Monday of a recession in the next six to nine months. Read more

The largest US bank by assets released its third-quarter results on Friday, followed by Wells Fargo (WFC.N), Citigroup (CN) and Morgan Stanley. Bank of America (BAC.N) and Goldman Sachs Group Inc (GS.N) recap earnings from major banks next week.

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Banks’ third-quarter profits are expected to fall between 13% and 46%, according to Refinitiv IBES estimates, which show Citigroup is expected to build the largest reserves in the quarter, totaling $1.51 billion. Read more

Factors that would drive higher loan loss provisions include fading fiscal stimulus, rising geopolitical tensions and high inflation, Barclays analysts wrote in a note.

However, a jump in reserves does not yet mean that all is gloomy for the financial sector, according to some.

“This is the best of times in terms of actual loan quality,” Wells Fargo analyst Mike Mayo said, adding that the banking sector is far more resilient with far less risk than before previous recessions.

Banks are also expected to record higher interest income thanks to the Fed’s oversized rate hikes.

Still, investors fear that the Fed’s tightening to calm inflation could eventually lead to a recession.

Shares of the big six U.S. banks have plunged between 14% and 34% so far this year.

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Reporting by Niket Nishant, Manya Saini and Mehnaz Yasmin in Bengaluru; Editing by Shinjini Ganguli and editing by Saumyadeb Chakrabarty

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