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Banks continue to project confidence despite economic headwinds

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According to Market Intelligence, December 2022

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Banks continue to project confidence despite economic headwinds

Inflation is at its highest level in 40 years, the Federal Reserve raised interest rates by the highest margin in almost 30 years and markets are bracing for a recession, but bank executives continued to project confidence at a recent investor conference.

Executives of several large financial institutions including Truist Financial Corp., Bank of America Corp., Morgan Stanley, Fifth Third Bancorp, American Express Co., Discover Financial Services and The PNC Financial Services Group Inc. weighed in on the economic outlook during the event. While they acknowledged economic headwinds like inflation, rising interest rates and the possibility of an incoming recession, they also pointed to near-record lows for unemployment, the persistent strength of credit, and the ability of their companies to overcome any challenges in the event of an economic downturn.

Consumer strength

Discover is seeing "incredibly strong" consumer spending despite inflation, CFO John Greene said. Additionally, Bank of America CFO Alastair Borthwick and Morgan Stanley CEO James Gorman said consumers are in "great shape."

Furthermore, deep recession is unlikely, Gorman said, noting that consumers are generally still employed and their balance sheets remain strong.

"I think eventually the Fed will get ahold of inflation ... but it's going to be bumpy," Gorman said. "People's 401(k) plans are going to be down this year, but we're unlikely at this stage to go into a deep or long recession."

Credit performance

Rising rates and inflation have yet to significantly impact credit performance at major banks, and statements from executives of Bank of America, Discover, Fifth Third and PNC reflected that.

"Where we first look is, 'is there anything in 90 days past due, or 30 to 60, or even five days,'" Borthwick said. "There has been no material change there at all."

In addition, credit at PNC remains "very strong" and the outlook is good despite macroeconomic warning signs, PNC CFO Robert Reilly said. Likewise, American Express is confident in its ability to quickly pivot if unemployment begins to rise or the economy slows, and sees no reason to change its strategy ahead of time, CFO Jeffrey Campbell said.

Comparing the current moment to the 2008 financial crisis, Truist CFO Daryl Bible said there is much more liquidity in the banking system today than there was in 2008, and banks thus have a much better starting point. That's in large part thanks to the federal pandemic assistance of the last two years like small business loans, stimulus checks, the child tax credit, and expanded unemployment insurance.

As for Fifth Third, the bank is insulated from credit losses because commercial real estate is only a small part of the company's portfolio and homeowners represent 86% of the company's depositors.

"We have very limited exposure to the sectors of the economy that we expect to feel it," incoming CEO Timothy Spence said.