With interest rates reaching their highest levels in over two decades and inflation continuing to impact consumers, major banks are preparing for increased risks associated with their lending practices.
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 that financial institutions set aside to cover potential losses from credit risks, including delinquent debts and lending, particularly in commercial real estate.
JPMorgan allocated $3.05 billion for credit losses during the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses rose to $21.8 billion by the end of the quarter, more than tripling its provision from the previous quarter. Wells Fargo established provisions totaling $1.24 billion.
The increase in provisions reflects banks’ concerns about a more challenging lending environment, with both secured and unsecured loans potentially leading to larger losses. A recent analysis of household debt by the New York Fed highlighted that Americans are collectively responsible for $17.7 trillion in consumer loans, student loans, and mortgages.
Rising credit card issuance and delinquency rates are also indicative of this trend, as many consumers deplete their pandemic-era savings and increasingly turn to credit. In the first quarter of this year, credit card balances reached $1.02 trillion, marking the second consecutive quarter where total cardholder balances surpassed the trillion-dollar threshold, according to TransUnion. The commercial real estate market remains in a vulnerable position.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, commented on the current economic landscape, emphasizing the ongoing impacts of the COVID-19 pandemic and the stimulus measures released to consumers.
However, any significant challenges for banks are anticipated in the coming months. Mark Narron, a senior director in Fitch Ratings’ Financial Institutions Group, explained that the provisions reported in any quarter are more reflective of banks’ expectations for the future rather than their past credit quality.
He noted a shift in the macroeconomic factors influencing provisioning, moving from a model where provisions rose as loans deteriorated to one where broader economic forecasts shape the provisioning landscape.
Looking ahead, banks foresee slower economic growth, rising unemployment, and predicted interest rate cuts later this year in September and December, which could lead to increased delinquencies and defaults.
Citi’s CFO Mark Mason highlighted that concerns seem to be particularly pronounced among lower-income consumers, whose savings have significantly diminished since the pandemic. He noted a disparity in financial resilience across different income levels, indicating that only the highest-income quartile has managed to increase their savings since 2019.
As the Federal Reserve maintains interest rates at a 23-year high of 5.25-5.5%, the central bank awaits stabilization in inflation measures before contemplating rate reductions.
Despite preparations for a potential rise in defaults in the latter part of the year, current trends do not indicate an impending consumer crisis, according to Mulberry. He is closely observing the distinctions between homeowners and renters during this economic shift.
While homeowners, having secured low fixed rates, may not feel the immediate impact of rising rates, renters face challenges with significant rent increases—over 30% nationwide since 2019—and rising grocery prices.
For now, the latest earnings report suggests stability within the banking sector, with no alarming changes in asset quality. Strong revenues and net interest income indicate a healthy financial landscape, although observers remain vigilant as prolonged high interest rates could induce further stress.