As interest rates remain at their highest levels in over 20 years and inflation continues to strain consumers, major banks are gearing up to confront heightened risks from their lending activities.
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 that banks set aside to manage potential losses associated with credit risk, which includes bad debt 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 reported a total of $21.8 billion in allowances for credit losses, significantly increasing its reserves from the prior quarter, and Wells Fargo designated $1.24 billion for the same purpose.
The increased reserves indicate that banks are preparing for a more challenging lending environment, where both secured and unsecured loans may lead to larger losses. A recent report from the New York Fed revealed that American households collectively owe $17.7 trillion across various types of consumer loans, including student and mortgage debt.
Additionally, credit card issuance is rising, with delinquency rates also climbing as individuals exhaust their pandemic-era savings and increasingly turn to credit. Total credit card balances reached $1.02 trillion in the first quarter of this year, marking the second consecutive quarter that balances exceeded a trillion dollars, as reported by TransUnion. The commercial real estate sector continues to face uncertainties as well.
Experts highlight that the financial landscape is still recovering from the impacts of COVID-19, with consumer financial health previously bolstered by government stimulus. Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted that while banks have taken provisions, it’s important to remember that these figures reflect future expectations rather than past performance.
Mark Narron, a senior director at Fitch Ratings, emphasized that the current economic outlook suggests slowing growth, increased unemployment, and potential interest rate cuts later this year, which could lead to higher rates of delinquency and defaults.
Citi’s CFO, Mark Mason, pointed out that the financial strain is particularly felt among lower-income consumers, who have experienced a depletion of savings since the pandemic. He noted that only consumers in the highest income quartile have been able to maintain their savings levels since early 2019, while those with lower credit scores have seen a marked decline in payment rates and are increasingly reliant on borrowing due to inflation and high-interest rates.
The Federal Reserve has maintained interest rates at a 23-year peak of 5.25-5.5%, pending stabilization of inflation towards its 2% target before any anticipated cuts.
Despite preparations for potential defaults in the latter half of the year, current trends do not indicate an impending consumer crisis, according to Mulberry. He highlights the divergence between homeowners, who benefited from low fixed-rate mortgages, and renters, who are grappling with sharply rising rents that have surged over 30% since 2019, alongside grocery prices increasing by 25%.
For now, analysts note that the latest earnings reports reflect stable asset quality in the banking sector, with solid revenues and interest income suggesting ongoing sector health. Mulberry remarked that the banking system appears robust, though ongoing scrutiny of interest rates remains crucial as sustained high rates could induce increasing stress.