As interest rates reach their highest levels in over two decades and inflation continues to pressure consumers, major banks are bracing for increased risks linked to 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 serve as a financial buffer against potential losses from credit risks, including bad debt and commercial real estate loans.
JPMorgan set aside $3.05 billion for credit losses in the second quarter, while Bank of America reserved $1.5 billion. Citigroup’s credit loss allowance rose to $21.8 billion at the end of the quarter, more than tripling its reserve from the prior period, and Wells Fargo’s provisions amounted to $1.24 billion.
These increased reserves indicate that banks are preparing for a more challenging economic environment, where both secured and unsecured loans could lead to significant losses. A recent analysis by the New York Fed revealed that Americans currently owe a total of $17.7 trillion in consumer loans, student loans, and mortgages.
Additionally, credit card issuance and delinquency rates have also climbed as many individuals exhaust their pandemic-era savings and increasingly rely on credit. In the first quarter of this year, credit card balances reached $1.02 trillion, marking the second consecutive quarter where total cardholder balances exceeded one trillion dollars, according to TransUnion. The commercial real estate sector remains particularly vulnerable.
Experts highlight that the impacts of the pandemic continue to influence the financial landscape. Brian Mulberry, a client portfolio manager at Zacks Investment Management, pointed out the effects of stimulus measures on consumer health.
However, any issues banks may face are expected to manifest in the coming months. Mark Narron, a senior director at Fitch Ratings, noted that the provisions set aside by banks reflect their expectations for future credit quality rather than recent loan performance.
As banks foresee a slowdown in economic growth, a rise in unemployment, and possible interest rate cuts in September and December, concerns about increasing delinquencies and defaults are growing.
Citigroup’s chief financial officer Mark Mason indicated that the warning signs are more pronounced among lower-income consumers who have seen their savings diminish since the pandemic began. He emphasized the variance in financial behavior across different income and credit score brackets.
The Federal Reserve has maintained interest rates at a range of 5.25% to 5.5%, waiting for inflation to stabilize before implementing anticipated rate cuts.
Despite banks’ preparations for wider defaults later in the year, experts assert that current default rates do not indicate a consumer crisis. Mulberry suggested that homeowners who secured low fixed interest rates during the pandemic are less affected, while renters are facing financial strain due to rising rents and living costs.
While the most recent earnings reports from banks show nothing alarming regarding asset quality, they do reflect positive signs in revenue, profits, and net interest income, indicating a still-robust banking sector. Mulberry noted the underlying strength of the financial system, but warned that prolonged high interest rates could lead to more significant stress in the future.