With interest rates at their highest in over two decades and inflation continuing to exert pressure on consumers, major banks are bracing themselves for potential increased risks associated with their lending practices.
In the second quarter, major banking institutions—namely JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo—have all increased their provisions for credit losses compared to the previous quarter. These provisions are essentially funds that banks allocate to counteract possible losses arising from credit risk, including delinquent accounts and problematic loans, particularly in the commercial real estate sector.
Specifically, JPMorgan set aside $3.05 billion for credit losses in the second quarter, while Bank of America earmarked $1.5 billion. Citigroup’s total allowance for credit losses reached $21.8 billion at the end of the quarter, marking a significant increase from the previous quarter. Wells Fargo’s provisions amounted to $1.24 billion.
These elevated provisions signal that banks are preparing for a potentially riskier lending landscape, where both secured and unsecured loans may lead to heavier losses for some of the nation’s largest financial institutions. According to a recent assessment of household debt from the New York Fed, Americans collectively owe approximately $17.7 trillion in various types of loans, including consumer and student loans as well as mortgages.
Rising credit card issuance coupled with increasing delinquency rates reflect how individuals are depleting their pandemic-era savings and increasingly relying on credit. TransUnion reported that total credit card balances hit $1.02 trillion in the first quarter of this year, marking it the second consecutive quarter that the total exceeded the trillion-dollar threshold. Additionally, the commercial real estate market remains in a delicate situation.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, commented on the shift in banking dynamics, emphasizing that the economic fallout from COVID-19 and the stimulus measures implemented heavily influenced consumer behavior.
Mark Narron, a senior director at Fitch Ratings, pointed out that current provisions do not necessarily reflect the immediate credit quality but rather the banks’ expectations for the future. As we look ahead, banks are predicting a slowdown in economic growth, an uptick in unemployment, and possible interest rate reductions later this year, which may lead to heightened delinquencies and defaults.
Citigroup’s chief financial officer, Mark Mason, highlighted concerns that seem to be more pronounced among lower-income consumers, who are notably seeing their savings diminish. He indicated that only the highest income quartile maintains greater savings relative to the pre-pandemic period, while those in lower FICO score ranges are increasingly grappling with financial challenges due to high inflation and rising interest rates.
Despite these challenges, defaults have not surged to levels indicating a consumer crisis. Mulberry noted that homeowners—having locked in low fixed rates during the pandemic—are presently feeling less financial strain compared to renters, who have faced substantial rental price increases over recent years.
The Federal Reserve currently holds interest rates at a record high of 5.25-5.5%, awaiting inflation metrics to stabilize towards its target of 2% before making likely rate adjustments.
For the time being, the overall health of the banking sector remains encouraging. Narron remarked that despite rising concerns, there were no new alarming signs regarding asset quality this quarter. The revenue, profits, and net interest income figures reflect continued vitality within the banking system. Mulberry affirmed that the banking sector appears robust, though lasting elevated interest rates may introduce additional stress over time.
In summary, while banks are preparing for possible negative outcomes from rising debt levels and economic changes, the foundations of the financial system are showing resilience. Continued monitoring of consumer behavior and economic factors will be crucial as we move forward.