As interest rates remain at their highest levels in over two decades and inflation continues to impact consumers, major banks are bracing for potential challenges stemming from their lending activities.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their reserves for credit losses compared to the previous quarter. This reserve is set aside to address potential losses from credit risks, including overdue debts and real estate loans.
In detail, JPMorgan increased its credit loss reserves by $3.05 billion, while Bank of America allocated $1.5 billion. Citigroup reported a total allowance of $21.8 billion, significantly more than the prior quarter, and Wells Fargo set aside $1.24 billion for potential losses.
These increased reserves indicate that banks are preparing for a more uncertain economic landscape, where both secured and unsecured loans may lead to larger losses. Recent data from the New York Fed revealed that total household debt, including consumer loans, student loans, and mortgages, has reached $17.7 trillion.
Additionally, credit card issuance and delinquency rates are rising as many individuals exhaust their pandemic-era savings and increasingly rely on credit. Credit card balances surpassed $1 trillion for the second straight quarter, according to TransUnion. Meanwhile, the commercial real estate sector remains vulnerable.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted that banks’ current issues are partly rooted in the effects of stimulus measures that were implemented during the COVID-19 pandemic.
Experts warn that challenges for banks could unfold in the near future. Mark Narron, a senior director at Fitch Ratings, explained that the provisions reported each quarter are forecasts of future credit quality rather than reflections of recent trends.
In the coming months, banks anticipate slower economic growth, rising unemployment, and possible interest rate cuts later in the year, which could increase delinquencies and defaults.
Citi’s CFO, Mark Mason, highlighted that challenges are mainly affecting lower-income consumers who have depleted their savings since the pandemic. He pointed out that only the highest-income quartile has managed to save more money than in early 2019, with higher-income and high credit score customers still maintaining robust spending and payment habits.
The Federal Reserve’s interest rates are currently set at a 5.25-5.5% range as it monitors inflation data, with planned cuts contingent on progress toward the 2% inflation target.
Despite preparations for increased defaults later this year, current defaults are not rising sharply enough to indicate a consumer crisis, according to Mulberry. He noted a significant distinction between homeowners, who were able to secure low fixed-rate mortgages, and renters, who are more pressured by high rental costs and rising living expenses.
Ultimately, while banks are adapting to a challenging economic environment, the latest earnings reports revealed no major surprises regarding asset quality, with healthy revenues and profits indicating a resilient banking sector. Mulberry expressed cautious optimism about the stability of the financial system but emphasized the potential stress that prolonged high interest rates could create.