US bank earnings could be hit by swings in Russia-linked assets

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Signs of JP Morgan Chase Bank, Citibank and Wells Fargo & Co bank are seen in this combined 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 affect first-quarter profits for major U.S. banks depending on what happens before the end of the month and the reaction of the markets, according to analysts.

Trade losses, expected loan loss provisions, asset write-downs and business closure costs could cloud what should have been a decent quarter as banks benefited from higher interest rates and more loans even as the flow of income from investment banks dwindled.

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

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“You really can’t tell because the markets move in such a volatile way based on changing geopolitical risks,” he said.

Market volatility has hurt stockbrokers, with prices swinging up and down rather than moving steadily as can happen when interest rates are expected to rise or fall, analysts said.

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

Major US banks begin reporting earnings on April 13.

Goldberg cited comments from the head of markets at JPMorgan Chase & Co (JPM.N) on March 8 that quarterly earnings had become unpredictable due to “significant counterparty risk” and “a lot of clients” subject to extreme stress, particularly from commodity trading.

Those risks were cited by bond rating firm Standard & Poor’s in a report on the potential impact of the conflict on Friday. S&P also warned of new operational issues in complying with sanctions and increased cyber risk.

So far, Citigroup Inc (CN) stands out the most as likely to report significant success. In addition to market exposures, its consumer bank in Russia could lead to losses.

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Citigroup said on March 2 that in “a severe stress scenario” it could be exposed to nearly $5 billion in losses from its Russian business. Read more

The bank has enough excess capital to handle this without serious damage, analysts said. But a success could slow its share buybacks – a key part of chief executive Jane Fraser’s plan to boost the bank’s valuation.

Citigroup shares are trading at a price below the company’s net worth and buying it back would add value.

The fallout from Russia’s invasion of Ukraine, which Moscow calls a “special military operation”, and ensuing sanctions, has intensified since the bank first guided potential losses.

Whether events point to a $2 or $4 billion hit for Citigroup in the first quarter or a different amount spread over the year is unclear, analysts said.

“The hardest part for us with Citi right now — and it’s probably hard for them too — is how much depreciation is needed,” Cassidy said. “Impairments are coming. We just don’t know how bad they are yet.”

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

Few analysts have updated their estimates for Citigroup since March 4. Many could delay estimates from major banks until the end of the quarter. Read more

By then, markets may have turned and more banks may have disclosed the consequences of the war and sanctions.

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

Some analysts did not want to be quoted on changes they would make to their first-quarter estimates. “We will have to add a number to find out what the arrangements will be,” said one.

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

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