Major banks are bracing for increased risks in their lending practices as interest rates remain at their highest levels in over two decades and inflation continues to impact consumers.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses compared to the previous quarter. These provisions represent the funds set aside by financial institutions to cover potential losses from credit risks, which can include delinquent loans and the risk associated with commercial real estate (CRE) loans.
JPMorgan has set aside $3.05 billion for credit losses during this period, while Bank of America reported $1.5 billion in provisions. Citigroup’s allowance for credit losses reached $21.8 billion at the end of the quarter, more than tripling its previous reserve, and Wells Fargo reported $1.24 billion.
The increase in provisions indicates that banks are preparing for a riskier economic environment, where both secured and unsecured lending may lead to increased losses. An analysis by the New York Fed shows that Americans currently owe a combined $17.7 trillion in consumer loans, student loans, and mortgages.
Credit card issuance is on the rise, along with delinquency rates, as consumers deplete their pandemic-era savings and turn to credit. By the first quarter of this year, credit card balances exceeded $1 trillion, marking the second consecutive quarter of surpassing that threshold. The commercial real estate sector also continues to face uncertainties.
According to Brian Mulberry, a client portfolio manager at Zacks Investment Management, the banking sector is still emerging from the COVID era, largely due to the stimulus measures that supported consumers.
Experts suggest that current provisions reflect future expectations more than past credit quality. Mark Narron, senior director at Fitch Ratings, emphasized that the current economic outlook—featuring slowing growth, rising unemployment, and anticipated interest rate cuts—could lead to increased delinquencies and defaults later in the year.
Citigroup’s CFO, Mark Mason, pointed out that financial difficulties appear to be concentrated among lower-income consumers whose savings have declined since the pandemic. He noted a significant disparity in financial health, with only the highest income quartile having increased savings since early 2019. Customers with higher credit scores are facilitating spending growth and maintaining high payment rates, while those with lower scores are experiencing significant declines in payment rates and increasing reliance on credit.
The Federal Reserve continues to maintain interest rates at a 23-year high of 5.25-5.5%, awaiting stabilization in inflation towards the central bank’s target of 2% before enacting anticipated rate cuts.
While banks prepare for potential defaults in the coming months, current default rates do not indicate a consumer crisis, according to Mulberry. He noted a distinction between the experiences of homeowners, who locked in low-rate mortgages, and renters, who have faced substantial cost increases without similar protections.
Rent prices have increased more than 30% nationally from 2019 to 2023, while grocery costs have risen 25% in the same period, placing significant pressure on renters who are struggling with rising expenses as wages have not kept pace.
Despite these concerns, the recent earnings reports revealed no new issues regarding asset quality. Narron observed that strong revenues, profits, and resilient net interest income suggest that the banking sector remains robust. Mulberry added that while the current health of the financial system is a relief, ongoing high-interest rates will continue to add stress to the economy.