As interest rates reach their highest levels in over 20 years and inflation continues to pressure consumers, major banks are bracing for increased risks associated with their lending operations.
In the second quarter, major financial institutions including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo significantly raised their provisions for credit losses compared to the previous quarter. These provisions serve to safeguard against potential losses from credit risks, such as delinquent loans and troubled assets like commercial real estate loans.
Specifically, JPMorgan set aside $3.05 billion for credit losses in the second quarter, while Bank of America allocated $1.5 billion. Citigroup’s allowance swelled to $21.8 billion by the end of the quarter, marking more than a threefold increase from the previous quarter, and Wells Fargo added $1.24 billion to its provisions.
These increased provisions suggest that banks are preparing for a more challenging economic landscape, where both secured and unsecured loans may result in greater losses. A recent study by the New York Fed indicated that American consumers are burdened with a collective $17.7 trillion in debt, which includes consumer loans, student loans, and mortgages.
Credit card issuance and delinquency rates are also on the rise, as many individuals are utilizing credit more heavily due to dwindling pandemic savings. The total credit card balances reached $1.02 trillion in the first quarter of this year, marking the second consecutive quarter that surpassed the trillion-dollar threshold, according to TransUnion. The commercial real estate sector remains particularly sensitive to economic fluctuations.
Brian Mulberry, a portfolio manager at Zacks Investment Management, noted that the banking landscape is still evolving from the aftermath of the COVID-19 pandemic, which significantly impacted consumer health due to widespread stimulus measures.
However, analysts caution that impending challenges for banks may manifest in the upcoming months. Mark Narron, from Fitch Ratings, pointed out that the provisions made by banks reflect their expectations for future credit quality rather than past performance.
Currently, banks anticipate slower economic growth, a rise in unemployment, and potential interest rate cuts later this year, which could lead to an increase in delinquencies and defaults as the year progresses.
Citi’s Chief Financial Officer Mark Mason highlighted that the financial stress is primarily concentrated among lower-income consumers, who have seen their savings significantly deplete in the wake of the pandemic. He indicated that while the overall U.S. consumer remains resilient, income disparities are affecting financial behaviors across different demographic segments.
The Federal Reserve has maintained interest rates at a 23-year high, between 5.25% and 5.5%, as it awaits signs of stabilization in inflation towards its target rate of 2%.
While banks are preparing for increased defaults later in the year, Mulberry suggested that current default rates do not yet indicate a consumer crisis. He emphasized the difference in financial burdens between homeowners and renters in the current economic climate, noting that those who secured low fixed-rate mortgages during the pandemic are largely shielded from the worst effects of rising rates.
Despite the challenges, many banks reported strong revenues and profits, which indicates a still-healthy banking sector. Mulberry expressed cautious optimism about the financial system’s resilience but warned that prolonged high interest rates could lead to increased stress in the economy.