Major banks are bracing for increased risks in their lending practices as interest rates remain at their highest levels in over 20 years and inflation continues to pressure consumers. In the second quarter, prominent institutions such as JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their provisions for credit losses compared to the previous quarter. These provisions are reserves set aside to address possible losses related to credit risks, which include bad debts and problematic loans.
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 reached $21.8 billion, more than tripling its reserves from the previous quarter, and Wells Fargo reported provisions of $1.24 billion.
This buildup suggests that banks are preparing for a more challenging environment where both secured and unsecured loans could lead to greater losses. A recent analysis by the New York Fed indicated that Americans collectively owe $17.7 trillion in various consumer loans, student loans, and mortgages. There has also been a rise in credit card issuance and delinquency rates as individuals deplete their pandemic-era savings and increasingly rely on credit, with credit card balances surpassing $1 trillion for the second consecutive quarter.
Economic uncertainties remain as experts note that issues for banks may become more pronounced in the future. Mark Narron from Fitch Ratings explained that the provisions seen in any given quarter do not merely reflect recent credit quality but are indicative of future expectations. Currently, banks anticipate slower economic growth, a rising unemployment rate, and potential interest rate cuts later this year, which could lead to an increase in delinquencies and defaults.
Citigroup’s chief financial officer, Mark Mason, observed that the economic challenges are particularly pronounced among lower-income consumers, who have experienced a decline in savings since the pandemic began. He highlighted that only consumers in the highest income bracket have retained more savings than they had in early 2019. Lower-income borrowers, identified by their FICO scores, are facing increased borrowing and falling payment rates due to heightened inflation and interest rates.
The Federal Reserve is maintaining interest rates between 5.25% and 5.5%, aiming for inflation to stabilize around its 2% target before executing anticipated rate cuts. Despite banks preparing for potential defaults in the latter half of the year, current data does not suggest an imminent consumer crisis. Analysts are closely monitoring the contrast between homeowners and renters, noting that those who locked in low fixed mortgage rates are less affected compared to renters, who are facing skyrocketing rents.
Overall, the recent earnings reports indicate no major concerns regarding asset quality, with strong revenues and profits signaling a still-healthy banking sector. While some strength in the financial system is evident, there are ongoing concerns about the prolonged high interest rates and the stress they may impose on consumers moving forward.