Major banks are bracing for increased risks in their lending practices as interest rates remain at more than 20-year highs and inflation continues to affect consumers. In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all elevated their provisions for credit losses compared to the previous quarter. These provisions are funds set aside by financial institutions to cover potential losses from credit risks, such as delinquent debts and 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 increased its allowance for credit losses to $21.8 billion, more than tripling its reserve from the previous quarter, and Wells Fargo’s provisions reached $1.24 billion.
These increased reserves indicate that banks are preparing for a more challenging lending environment, where both secured and unsecured loans may result in greater losses. An analysis by the New York Federal Reserve revealed that American households collectively owe $17.7 trillion in consumer loans, student loans, and mortgages.
Credit card issuance and delinquency rates are on the rise as many individuals exhaust their savings from the pandemic and increasingly rely on credit. TransUnion reported that credit card balances hit $1.02 trillion in the first quarter, marking the second consecutive quarter where total balances exceeded the trillion-dollar threshold. The CRE sector also faces ongoing challenges.
Experts suggest that economic conditions, such as rising unemployment and anticipated interest rate cuts later this year, may lead to more delinquencies and defaults. Citi’s chief financial officer, Mark Mason, pointed out that the financial strain appears concentrated among lower-income consumers, who have depleted their savings since the pandemic.
Mason observed a contrasting performance among different income groups, noting that only the highest income quartile has maintained more savings than they had in early 2019. Customers with FICO scores above 740 are driving spending growth, while those with lower scores are experiencing declines in payment rates, as they are more affected by high inflation and interest rates.
Despite the preparations for potential defaults, current delinquency rates do not indicate a consumer crisis. Observations in the housing market highlight the divide between homeowners, who secured low fixed rates during the pandemic, and renters burdened by rising rental costs.
Rent prices have surged over 30% from 2019 to 2023, while grocery costs have risen by 25% in the same timeframe. Renters, lacking the benefit of low mortgage rates, are feeling the most financial strain.
For now, the latest round of earnings reports suggests that the banking sector remains stable, showing strong revenues and profits. Analysts emphasize that, although high interest rates are putting pressure on the system, the overall structure of the financial system is still robust.