With interest rates reaching levels not seen in over 20 years and inflation pressuring consumers, major banks like JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are bracing for increased risks in their lending practices.
In the second quarter, these banks increased their credit loss provisions compared to the previous quarter. These provisions represent funds set aside to mitigate potential losses from credit risks such as bad debts and delinquent loans, including those related to commercial real estate.
JPMorgan reported a provision of $3.05 billion, while Bank of America allocated $1.5 billion. Citigroup’s allowance for credit losses reached $21.8 billion, more than triple its prior quarter’s reserves, and Wells Fargo set aside $1.24 billion.
These provisions indicate that banks expect a riskier lending environment, with secured and unsecured loans potentially leading to greater losses. The New York Fed recently analyzed household debt, revealing that Americans collectively owe $17.7 trillion across consumer loans, student loans, and mortgages.
Credit card issuance is increasing alongside rising delinquency rates, as consumers deplete their pandemic-era savings and increasingly rely on credit. As of the first quarter of this year, credit card balances exceeded $1 trillion for the second consecutive quarter, according to TransUnion. The commercial real estate sector also remains vulnerable.
Experts note that the current economic challenges stem from the aftermath of the COVID-19 pandemic. Brian Mulberry, a client portfolio manager at Zacks Investment Management, remarked on the impact of stimulus measures on consumer financial health.
Mark Narron, a senior director at Fitch Ratings, elaborated that current provisions reflect banks’ future expectations rather than past credit quality.
Looking ahead, banks foresee slowing economic growth, rising unemployment, and two potential interest rate cuts later this year, which could lead to increased delinquencies and defaults.
Citigroup’s CFO, Mark Mason, highlighted concerns among lower-income consumers, who have reported declining savings since the pandemic. He noted that only the highest income consumers have increased their savings over the past few years, while lower FICO score customers are facing more significant payment challenges.
The Federal Reserve continues to maintain interest rates at a 23-year high, waiting for inflation to stabilize before considering cuts.
As defaults have not yet escalated to alarming levels, experts remain cautiously optimistic. Mulberry indicated a focus on the differences in financial pressures between homeowners and renters during the pandemic. Homeowners benefitted from low fixed-rate loans, while renters have faced escalating costs due to rising rents and grocery prices.
In summary, the recent earnings reports show no significant deterioration in asset quality, with strong revenues and profits still suggesting a resilient banking sector. Observers note that while the banking system remains robust, sustained high interest rates could lead to increased financial stress in the future.