With interest rates at their highest levels in over two decades and inflation impacting consumers, major banks are bracing for increased risks associated with their lending activities.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses, which are funds set aside to cover potential losses from credit risks, including delinquent loans and bad debts, particularly in commercial real estate.
JPMorgan reported a provision for credit losses totaling $3.05 billion for the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s credit loss allowance reached $21.8 billion by the end of the quarter, significantly increasing from the previous quarter, and Wells Fargo recorded provisions amounting to $1.24 billion.
These increased provisions indicate that banks are preparing for a more challenging financial landscape, where both secured and unsecured loans may result in higher losses. According to a recent analysis from the New York Fed, American households currently owe a staggering $17.7 trillion in various consumer debts, including loans and mortgages.
Credit card usage and delinquency rates are also climbing as many individuals tap into their savings accumulated during the pandemic and increasingly rely on credit. Credit card balances surpassed $1.02 trillion in the first quarter of this year, marking the second consecutive quarter where total cardholder balances exceeded the trillion-dollar threshold, according to TransUnion. The commercial real estate sector continues to face uncertainty as well.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted that while banks are adjusting to the post-COVID environment, the stimulus measures provided to consumers have played a significant role in shaping current banking conditions.
Experts suggest that current provisions do not solely reflect past credit quality but are primarily driven by banks’ future expectations regarding economic conditions. Mark Narron, a senior director in Fitch Ratings’ Financial Institutions Group, emphasized that banks are currently forecasting a slowdown in economic growth, an increase in unemployment, and potential interest rate cuts later in the year.
Citi’s chief financial officer, Mark Mason, highlighted that the greatest vulnerabilities appear to be among lower-income consumers, whose savings have declined since the pandemic. He pointed out that only the highest income bracket has maintained increased savings compared to pre-2019 levels, while lower FICO score customers are experiencing reduced payment rates and higher borrowing rates due to the pressures of inflation and rising interest rates.
The Federal Reserve has sustained interest rates at a 23-year high of 5.25-5.5%, awaiting stabilization in inflation rates before considering rate cuts.
Despite banks’ preparations for increased defaults later this year, current default rates do not yet indicate a looming consumer crisis. Mulberry noted that homeowners who secured low fixed-rate mortgages during the pandemic are less affected by rising rates compared to renters, who face soaring rents and inflation pressures.
Concerning asset quality, the most recent earnings reports indicated stability, with strong revenues and profits signifying a resilient banking sector. Mulberry expressed relief over the banking system’s ongoing strength but acknowledged the stress that prolonged high-interest rates may impose going forward.