It is going to be messy on Wall Street
JPMorgan will kick things off when it reports results on January 14, and analysts are expecting a 'clean-up' quarter after a turbulent three months.
That means you can expect plenty of one-off provisions and charges that banks use to write-off weak businesses. In this quarter, a lot of those one-offs are going to be related to struggling borrowers in the energy market and elsewhere.
"Overall, expectations remain reasonably low, thanks to the challenge of low interest rates and capital markets weakness, additional loan loss reserve build and myriad fourth quarter clean up actions," Credit Suisse analysts led by Susan Katzke said in a note Tuesday.
A rocky patch
The final three months of 2015 proved to be a rocky stretch for the biggest banks. By mid-December it was clear that a late-quarter rout in the high-yield bond market was likely to hit revenues.
The sell-off originated in the energy sector, as oil prices plummeted and oil and gas companies struggled to pay of their debts. The weakening of the credit markets impacts both the trading book, as banks face choppy conditions, but also capital markets activity and the value of loans carried on the banks' books.
CLSA banks analyst Mike Mayo told Business Insider that the focus for fourth-quarter earnings would be "energy, energy, energy."
The 2015 Shared National Credits exam, a Federal Reserve initiative to review and classify large syndicated loans, in November found that classified loans to oil and gas companies jumped four-fold. Classified loans are those with unpaid interest and principal outstanding that are in danger of defaulting.
There's pain elsewhere too. In a note on Tuesday, Credit Suisse analyst Chris Bolu said that half of the sectors covered by a high-yield index have "elevated credit spreads" or a sign that investors are worried.
Bolu wrote:
"We increasingly see signs that the high yield deterioration is moving past energy related markets. We note that sectors such as information technology, media telecoms, retail and services are now showing some signs of deterioration."
Bolu added that "investor attention is increasingly turning to the risk and implications of a turn in the credit cycle."