As interest rates remain at levels not seen in over 20 years and inflation continues to pressure consumers, major banks are preparing for increased risks in 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 banks set aside to cover potential losses from credit risks, including defaults on loans and delinquent debts.
Specifically, JPMorgan allocated $3.05 billion for credit losses in the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses climbed to $21.8 billion by the end of the quarter, more than tripling its reserves from the previous quarter, and Wells Fargo held provisions of $1.24 billion.
These increases indicate that banks are bracing for a more challenging lending environment, where losses from both secured and unsecured loans could rise for some of the nation’s largest financial institutions. According to recent analysis by the New York Fed, American households now owe a staggering $17.7 trillion in consumer loans, student loans, and mortgages.
Moreover, credit card usage is on the rise, with delinquency rates increasing as individuals deplete their savings accumulated during the pandemic and increasingly turn to credit. In the first quarter of this year, credit card balances reached $1.02 trillion, marking the second consecutive quarter of exceeding the trillion-dollar mark, according to TransUnion. Commercial real estate (CRE) also remains vulnerable amidst these trends.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted, “We’re still coming out of this COVID era,” emphasizing that stimulus measures provided to consumers have played a significant role in the current banking landscape.
Experts warn that any issues for banks may manifest in the coming months. Mark Narron, a senior director at Fitch Ratings, explained that the provisions reported in any quarter do not directly reflect past credit quality but rather banks’ expectations for the future.
With projections indicating a slowdown in economic growth, a rising unemployment rate, and anticipated interest rate cuts later this year, banks are preparing for potential increases in delinquencies and defaults.
Citi’s chief financial officer, Mark Mason, highlighted that these warning signs are particularly pronounced among lower-income consumers, many of whom have seen their savings diminish since the pandemic began. He observed a significant divergence in economic behavior, noting, “Only the highest income quartile has more savings than they did at the beginning of 2019.”
The Federal Reserve has maintained interest rates at a high range of 5.25-5.5% as it awaits stabilization in inflation measures towards its 2% target before implementing anticipated rate cuts.
Despite preparations for increased defaults later this year, current data indicates a consumer crisis has not yet materialized. Mulberry pointed out the distinction between homeowners and renters during the pandemic, stating that homeowners, benefiting from low fixed-rate mortgages, are less affected by rising costs compared to renters.
With rents climbing over 30% nationally from 2019 to 2023 and grocery prices surging by 25% during the same timeframe, renters who could not secure low rates are experiencing significant financial strain.
However, the recent earnings reports indicate stability in the banking sector. Narron remarked, “There was nothing new this quarter in terms of asset quality,” noting strong revenues and profits as signs of a resilient banking industry. Mulberry added that while the financial system remains robust, the persistence of high interest rates may induce greater stress going forward.