With interest rates reaching their highest levels in over two decades and inflation putting pressure on consumers, major banks are getting ready to navigate 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 are funds set aside by banks to cover potential losses from credit risks, including defaults on loans and delinquent debts.
JPMorgan allocated $3.05 billion for credit losses during the second quarter, while Bank of America set aside $1.5 billion. Citigroup reported a total of $21.8 billion in credit loss reserves, which marked a significant rise from earlier in the year, and Wells Fargo established provisions amounting to $1.24 billion.
This increase in reserves suggests that banks are preparing for a more challenging lending environment, where both secured and unsecured loans could potentially result in higher losses. A recent analysis from the New York Fed revealed that total household debt in the U.S. stands at $17.7 trillion, covering consumer loans, student loans, and mortgages.
Additionally, credit card issuance and delinquency rates are climbing as individuals exhaust their pandemic-era savings and increasingly rely on credit. According to TransUnion, total credit card balances reached $1.02 trillion in the first quarter, marking the second consecutive quarter where total cardholder balances surpassed the trillion-dollar mark. The commercial real estate sector also remains in a vulnerable position.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted that the ongoing effects of the COVID era significantly impact the banking landscape and consumer financial health due to the stimulus funds that were previously distributed.
Future issues for banks may emerge in the coming months. Mark Narron, a senior director with Fitch Ratings, explained that the provisions indicated in any given quarter are more reflective of banks’ future expectations than immediate credit quality.
The banks foresee a slowdown in economic growth, alongside rising unemployment and two anticipated interest rate cuts later this year, which could lead to increased delinquencies and defaults by year’s end.
Citi’s Chief Financial Officer Mark Mason highlighted that troubling signs predominantly affect lower-income consumers, who have seen their savings decline post-pandemic. He observed a significant divergence in consumer behavior and performance based on income levels and credit scores.
As the Federal Reserve maintains interest rates at a 23-year high of 5.25%-5.5%, it awaits signs of inflation stabilizing to its 2% target before implementing expected rate cuts.
Despite banks bracing for greater defaults in the latter half of the year, there hasn’t been a considerable surge in defaults suggesting a consumer crisis yet. Mulberry noted a distinction between homeowners and renters during this period. While homeowners benefited from locking in low fixed rates, renters continue to face rising rental costs.
With rents increasing over 30% nationally between 2019 and 2023 and grocery prices climbing 25%, those renting without the advantage of fixed rates are experiencing the most financial strain.
Currently, the overall performance of the banking sector appears stable, with earnings reporting indicating no significant new issues concerning asset quality. Positive indicators such as strong revenues, profits, and net interest income suggest a robust banking environment. However, Mulberry cautioned that prolonged high interest rates could lead to increased financial stress in the sector.