As interest rates remain at their highest levels in over two decades and inflation continues to impact 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 reported an increase in their provisions for credit losses compared to the previous quarter. These provisions are funds set aside by banks to account for potential losses related to credit risk, including delinquent debt and commercial real estate loans.
JPMorgan allocated $3.05 billion for credit losses in 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, reflecting a significant tripling from the previous quarter. Wells Fargo reported provisions totaling $1.24 billion.
These increased reserves indicate that banks are preparing for a volatile environment, where both secured and unsecured loans could lead to greater losses. A recent analysis from the New York Federal Reserve highlighted that Americans owe a staggering $17.7 trillion across various types of loans, including consumer, student, and mortgage debts.
The rise in credit card issuance, coupled with increasing delinquency rates, reveals consumers are depending more on credit as their savings from the pandemic era dwindle. Credit card balances surpassed $1 trillion for the second consecutive quarter, according to TransUnion. Additionally, the commercial real estate market remains in a delicate state.
According to Brian Mulberry, a client portfolio manager at Zacks Investment Management, the effects of COVID-19 are still influencing consumer financial health, primarily due to the stimulus measures that were enacted.
Experts caution that the challenges faced by banks may emerge in the upcoming months. Mark Narron, a senior director at Fitch Ratings’ Financial Institutions Group, explained that the provisions noted in any given quarter are often reflective of future expectations rather than past credit quality.
Currently, banks predict a slowdown in economic growth, an uptick in unemployment rates, and potential interest rate cuts later this year. Such factors could contribute to increased delinquencies and defaults as the year progresses.
Citi’s Chief Financial Officer Mark Mason highlighted that concerns appear to be particularly pronounced among lower-income consumers, who have seen their financial buffers shrink since the pandemic began.
While there is an overall resilience among American consumers, Mason noted significant disparities in financial health across different income levels. Only the highest income quartile has seen an increase in savings since early 2019, and customers with high credit scores are leading in spending growth and managing repayments, in contrast to those with lower credit scores who are experiencing declining payment rates and rising borrowing.
The Federal Reserve has maintained interest rates at a range of 5.25-5.5% for 23 years, awaiting stabilization of inflation towards its target of 2% before considering cuts.
Despite banks expecting an uptick in defaults, current rates of defaults do not yet signal a widespread consumer crisis. Mulberry pointed out a distinction between homeowners and renters during the pandemic. While homeowners secured low fixed rates on their debts, renters have not benefited from such opportunities.
Rents have surged over 30% nationally between 2019 and 2023, while grocery costs have increased by 25%, significantly straining the budgets of renters who have not seen wages keep pace.
Overall, the most recent earnings reports indicate stability within the banking sector, with no significant shifts in asset quality. Strong revenues, profits, and solid net interest income are reassuring signs of a robust banking environment. Mulberry emphasized the importance of monitoring the situation, noting that prolonged high interest rates could lead to increased stress in the sector.