With interest rates at their highest in over two decades and inflation impacting consumers, major banks are preparing for increased risks in their lending practices.
In the second quarter, prominent banks including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their provisions for credit losses compared to the previous quarter. These provisions act as a financial cushion against potential losses from credit risks, including delinquent debts and commercial real estate loans.
JPMorgan set aside $3.05 billion for credit losses, while Bank of America allocated $1.5 billion. Citigroup’s allowance reached $21.8 billion, more than tripling its reserve from the previous quarter, and Wells Fargo reported provisions of $1.24 billion.
These increased reserves indicate that banks are bracing for a riskier economic landscape, where both secured and unsecured loans may lead to significant losses. A recent analysis by the New York Fed revealed that American households collectively owe $17.7 trillion in various loans, including consumer and mortgage debts.
Credit card issuance and delinquency rates are rising as many individuals deplete their pandemic savings and begin relying on credit more heavily. In the first quarter of this year, credit card balances surpassed $1 trillion for the second consecutive quarter, according to TransUnion. In addition, the commercial real estate sector remains vulnerable.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, commented on the ongoing recovery from the COVID-19 era, emphasizing the effects of government stimulus on consumer health. However, the actual problems for banks may manifest in the near future.
Mark Narron, a senior director at Fitch Ratings, highlighted that provisions set aside in any quarterly report are based on future expectations rather than recent credit quality. He noted a shift from a historical approach, where rising delinquencies led to increased provisions, to a model driven primarily by macroeconomic forecasts.
Banks are projecting slower economic growth, higher unemployment rates, and potential interest rate cuts in the coming months, which could increase delinquencies and defaults.
Citigroup’s CFO, Mark Mason, identified that the challenges seem particularly concentrated among lower-income consumers, who have seen their savings diminish since the pandemic. He mentioned that while the overall U.S. consumer remains resilient, there is a noticeable divergence based on income levels and credit scores.
The Federal Reserve continues to maintain interest rates between 5.25% and 5.5% as it seeks to stabilize inflation towards its 2% target before making any anticipated rate cuts.
Despite banks preparing for potential defaults in the latter half of the year, Mulberry conveyed that defaults are not rising to a level that suggests a consumer crisis at this point. He is particularly focused on the differences in financial pressure between homeowners and renters during the pandemic era. Homeowners benefiting from fixed low rates are in a relatively stable position, while renters face heightened stress due to soaring rental prices.
Overall, the recent earnings reports suggest that there were no significant new issues regarding asset quality this quarter. Strong revenues, profits, and solid net interest income continue to indicate that the banking sector remains healthy.
Mulberry noted a certain strength within the banking system, which, while expected, is reassuring. He cautioned that the longer interest rates remain elevated, the greater the stress these conditions could impose.