As interest rates remain at their highest levels in over two decades and inflation continues to impact consumers, major banks are preparing for increased risks related to their lending activities.
In the recent second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo have all increased their provisions for credit losses compared to the previous quarter. These provisions represent the funds set aside by banks to cover potential losses from credit risks such as overdue debts and non-performing loans, including those in the commercial real estate sector.
Specifically, JPMorgan allocated $3.05 billion for credit losses in the second quarter; Bank of America set aside $1.5 billion; Citigroup’s total reached $21.8 billion, more than tripling its allocation from the previous quarter; and Wells Fargo increased its provisions to $1.24 billion.
These provisions indicate that banks are preparing for a more challenging lending environment, where both secured and unsecured loans could lead to heightened losses. Recent data from the Federal Reserve shows that American households collectively owe $17.7 trillion in consumer, student loan, and mortgage debt.
The rise in credit card issuance and delinquency rates is also noteworthy, as consumers exhaust their pandemic-era savings and increasingly rely on credit. Credit card balances hit $1.02 trillion in the first quarter of this year, marking the second consecutive quarter where totals exceeded the trillion-dollar mark, based on TransUnion data. The state of commercial real estate lending also remains concerning.
Experts emphasize that the current economic challenges are partly a legacy of the COVID-19 pandemic and the stimulus measures implemented to support consumers during that time. According to Brian Mulberry, a client portfolio manager at Zacks Investment Management, banks must brace themselves for potential issues in the coming months.
Mark Narron, a senior director in Fitch Ratings’ Financial Institutions Group, pointed out that provisions are more indicative of future expectations than past credit quality. He noted that rather than reacting solely to immediate loan defaults, banks are adjusting their provisions based on overarching economic forecasts.
In the near term, banks foresee slowed economic growth, rising unemployment, and two anticipated interest rate cuts later this year. This scenario could likely lead to increased delinquencies and loan defaults as the year concludes.
Citi’s Chief Financial Officer Mark Mason highlighted that concern over credit issues is particularly focused on lower-income consumers, who have seen their financial reserves diminish since the pandemic. While overall consumer health appears strong, disparities exist across different income segments, with only the highest-income group maintaining more savings than they had in early 2019.
Currently, homeowners who locked in low fixed-rate mortgages during the pandemic seem less affected by rising interest rates, while renters face significant challenges with increasing rental prices that have surged over 30% nationwide since 2019, along with grocery costs that have risen by 25%.
Despite banks bracing for potential defaults, experts indicate that current default rates do not signal an imminent consumer crisis. The ongoing strength in bank revenues, profits, and net interest income suggests that the banking sector remains robust, although prolonged high interest rates could generate more pressure in the financial landscape.