As interest rates reach their highest levels in over 20 years and inflation continues to impact consumers, major banks are bracing for increased risks tied to their lending activities.
In the second quarter of the year, prominent banks including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for potential credit losses compared to the previous quarter. These provisions represent the funds that banks reserve to cover anticipated losses from defaults, including issues related to delinquent debts 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 provisions reached $21.8 billion, reflecting a more than threefold increase from the prior quarter, and Wells Fargo recorded $1.24 billion in provisions.
This buildup of reserves indicates that banks are preparing for a more challenging financial landscape, where both secured and unsecured loans may lead to larger losses. A recent analysis by the New York Federal Reserve revealed that American households now carry a total debt of $17.7 trillion, encompassing consumer loans, student loans, and mortgages.
Additionally, credit card usage and delinquency rates are rising as many individuals deplete their pandemic savings and increasingly rely on credit. Credit card balances surpassed $1 trillion for the second consecutive quarter, according to TransUnion. The commercial real estate sector also remains vulnerable.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, commented on the current economic climate as the country continues to recover from the impacts of the COVID-19 pandemic and associated stimulus measures.
He noted that while the current provisions might not directly reflect immediate credit quality, they are indicative of banks’ expectations for future credit risks. Mark Narron, a senior director at Fitch Ratings, emphasized that the recent shift in provisioning practices is largely driven by macroeconomic forecasts rather than just the performance of existing loans.
Looking ahead, banks anticipate a slowdown in economic growth, rising unemployment, and potential interest rate cuts later this year, which could lead to an increase in delinquencies and defaults.
Citi’s Chief Financial Officer, Mark Mason, pointed out that economic struggles appear to be more pronounced among lower-income consumers who have experienced declines in their savings since the pandemic began. He highlighted a significant disparity in financial health among consumers, with only the highest-income quartile having more savings now than they did in early 2019. Those with lower FICO scores are facing greater challenges in maintaining payment rates and managing borrowing.
The Federal Reserve is maintaining interest rates at a 23-year high of 5.25-5.5%, waiting for inflation to stabilize towards its 2% target before considering rate cuts. Despite preparations for potential defaults, experts like Mulberry indicate that defaults are not currently rising at a level that suggests a consumer crisis is imminent. He noted the difference between homeowners and renters, with homeowners benefiting from locked-in low fixed rates, while renters are facing heightened financial strain due to rising rental costs and escalating grocery prices.
While the latest earnings reports reveal stability within the banking sector, Narron emphasized that there were no significant shifts in asset quality. Overall, strong revenues, profits, and consistent net interest income reflect a resilient banking industry, even amid concerns about the long-term impacts of sustained high interest rates.