As interest rates hit their highest levels in over two decades and inflation remains a concern for consumers, major banks are bracing for increased risks in their lending activities. 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 are funds set aside to account for potential losses stemming from credit risks, including unpaid debts and commercial real estate loans.
JPMorgan allocated $3.05 billion for credit loss provisions in the last quarter; Bank of America set aside $1.5 billion; Citigroup’s allowance reached $21.8 billion at the end of the quarter, marking a significant increase; and Wells Fargo recorded provisions of $1.24 billion.
These growing reserves indicate that banks are anticipating a challenging environment, where both secured and unsecured loans may lead to larger losses. According to a recent analysis from the New York Fed, Americans currently owe a total of $17.7 trillion in consumer, student, and mortgage loans.
The increase in credit card issuance and delinquency rates also aligns with the observation that many consumers are relying more on credit as their pandemic savings diminish. Credit card balances soared to $1.02 trillion in the first quarter of this year, the second consecutive quarter exceeding the trillion-dollar threshold, as reported by TransUnion. Additionally, the commercial real estate sector remains in a vulnerable state.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted the ongoing effects of the COVID-19 pandemic on banking and consumer health, particularly highlighting the role of government stimulus.
However, any financial troubles for the banks are anticipated in the upcoming months. Mark Narron, a senior director in Fitch Ratings, explained that the provisions reported by banks do not necessarily reflect recent credit quality but rather their future expectations.
Banks are currently forecasting slower economic growth, increased unemployment, and two anticipated interest rate cuts later this year. This outlook could lead to higher rates of delinquency and default as the year comes to a close.
Citi’s chief financial officer Mark Mason pointed out that these economic warning signs are particularly evident among lower-income consumers, who have experienced a decrease in savings since the pandemic.
Despite an overall resilient U.S. consumer base, Mason observed a performance gap across different income and credit score demographics. He noted that only the top income quartile has increased their savings since early 2019, while those in lower FICO bands are seeing a decline in payment rates and are borrowing more due to the pressures of inflation and high interest rates.
The Federal Reserve has maintained interest rates at a 23-year high of 5.25-5.5%, awaiting stabilization in inflation rates before making any anticipated cuts.
Although banks are preparing for potential defaults later this year, they have not yet seen an uptick in defaults indicating a consumer crisis. Mulberry is particularly focused on the differentiation between homeowners and renters during this period. He noted that those who purchased homes during the pandemic have largely benefited from lower fixed-rate loans, while renters, faced with substantially rising rents, are feeling the financial strain.
From the latest earnings reports, analysts have observed that overall asset quality remains stable, with robust revenues, profits, and net interest income suggesting a healthy banking sector for now. Mulberry stated that while the banking system’s current structure appears strong, prolonged high-interest rates could lead to increased stress in the future.