Big banks are gearing up for potential challenges in their lending practices as interest rates reach their highest levels in over 20 years and inflation continues to weigh heavily on consumers. 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 financial institutions to mitigate potential losses from credit risks, including bad debts and delinquent loans, particularly in sectors such as commercial real estate.
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 surged to $21.8 billion, more than tripling from the previous quarter, and Wells Fargo recorded provisions of $1.24 billion.
These increased reserves indicate that banks are anticipating a more challenging lending environment, where both secured and unsecured loans could lead to larger losses. A recent analysis by the New York Fed highlighted that American households are carrying a collective debt of $17.7 trillion in consumer loans, student loans, and mortgages.
Moreover, credit card issuance and delinquency rates have been rising as consumers exhaust their pandemic-era savings and rely more on credit. Credit card balances reached $1.02 trillion in the first quarter of this year, marking the second consecutive quarter where totals surpassed the trillion-dollar threshold, according to TransUnion. The commercial real estate market also remains in a fragile state.
Experts note that the ongoing effects of the COVID-19 pandemic, combined with various economic stimuli, play a crucial role in the current state of banking and consumer health. According to Mark Narron of Fitch Ratings, the provisions reported by banks at any quarter do not solely reflect past credit quality but also their expectations for the future.
Looking ahead, banks expect slowing economic growth, a rise in unemployment, and potential interest rate cuts later this year, which could lead to an increase in delinquencies and defaults. Citigroup’s CFO, Mark Mason, pointed out that while the overall U.S. consumer remains resilient, there’s a notable divergence in performance, especially among lower-income consumers who have depleting savings. Those in higher income brackets are faring better, with only the top quartile having more savings than at the start of 2019.
Despite preparations for a potential rise in defaults, analysts believe that current default rates do not yet suggest an impending consumer crisis. Observations reveal a contrast between homeowners and renters, with homeowners benefiting from fixed low rates while renters face surging housing costs.
Overall, the latest earnings reports revealed no significant new issues with asset quality in the banking sector. Strong revenue and profits along with healthy net interest income indicate the sector remains robust, even as the resilience of the financial system is closely monitored amid high interest rates.