As interest rates remain at the highest levels in over two decades and inflation continues to impact consumers, major banks are taking precautions against potential risks in their lending operations.
In the second quarter, major financial institutions including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their provisions for credit losses compared to the previous quarter. These provisions represent funds set aside to cover potential losses from credit risks, including defaults and problematic debts, particularly in commercial real estate (CRE) loans.
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 reached $21.8 billion, marking a significant increase from the previous quarter, and Wells Fargo reported provisions of $1.24 billion.
These proactive measures reflect the banks’ anticipation of a more challenging environment, where both secured and unsecured loans may lead to greater losses. Recent research from the New York Fed indicates that U.S. consumers carry a collective debt of $17.7 trillion in the form of consumer loans, student loans, and mortgages.
Credit card use, along with delinquency rates, is also rising as individuals deplete their pandemic savings and increasingly rely on credit. As of the first quarter of this year, credit card balances reached $1.02 trillion, which is the second consecutive quarter where total credit card balances surpassed the trillion-dollar mark, according to TransUnion. The CRE sector remains particularly fragile.
Experts note that as banks navigate the post-pandemic landscape, the effects of past economic stimulus on consumer behavior are still unfolding. Brian Mulberry, a portfolio manager at Zacks Investment Management, highlighted the implications for the banking sector and consumers alike.
Mark Narron, a senior director at Fitch Ratings, pointed out that the provisions set by banks do not solely reflect recent credit quality but are largely influenced by future economic expectations. He indicated that banks are preparing for potential challenges ahead, including anticipated economic slowdown, higher unemployment rates, and possible interest rate cuts later this year.
Citi’s CFO, Mark Mason, emphasized that emerging risks appear to be concentrated among lower-income consumers who have seen their savings diminish since the pandemic began. He noted a notable divide in consumer behavior between high-income earners, who have increased savings, and those with lower credit scores facing difficulties.
The Federal Reserve has maintained a range of 5.25%-5.5% for interest rates, waiting for inflation to stabilize towards its target of 2% before considering rate reductions.
While banks are taking steps to brace for defaults later this year, current default rates do not indicate a consumer crisis. Mulberry is particularly observing the differences in financial pressures faced by homeowners and renters, noting that homeowners, due to historically low fixed mortgage rates, may not be experiencing the same level of distress as renters.
Despite rising rates and inflationary pressures, the latest earnings reports from financial institutions have not revealed significant new concerns regarding asset quality, highlighting the overall stability of the banking sector. Positive indicators such as strong revenues and net interest income suggest resilience in the industry, although experts caution that sustained high interest rates could impose further stress.