As interest rates reach levels not seen in over 20 years and inflation continues to affect consumers, major banks are bracing for potential risks stemming from their lending operations.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses compared to the previous quarter. These provisions are funds that banks set aside to cover expected losses from defaults, including bad debt and commercial real estate (CRE) loans.
JPMorgan established $3.05 billion in credit loss provisions for the quarter, while Bank of America allocated $1.5 billion. Citi reported a total of $21.8 billion in allowances for credit losses at the quarter’s end, a significant increase from the previous quarter, and Wells Fargo set aside $1.24 billion.
This increase in reserves indicates that banks are preparing for a potentially riskier financial landscape, where both secured and unsecured loans could lead to substantial losses. A recent report from the New York Federal Reserve highlights that Americans owe a total of $17.7 trillion across consumer loans, student loans, and mortgages.
Additionally, credit card issuance and delinquency rates are rising as individuals exhaust their savings from the pandemic and increasingly rely on credit. For instance, credit card balances reached $1.02 trillion in the first quarter of this year, marking the second consecutive quarter where the total exceeded one trillion dollars. Commercial real estate remains particularly vulnerable in this climate.
Economist Brian Mulberry from Zacks Investment Management commented on the situation, noting the ongoing impacts of the pandemic and stimulus measures on consumer finances.
Looking ahead, bank officials caution that any significant issues are likely to arise in the coming months. According to Mark Narron from Fitch Ratings, current provisions reflect banks’ expectations of future credit quality rather than past performance.
The banks are forecasting a slowdown in economic growth, rising unemployment, and potential interest rate cuts later this year, which could lead to an increase in delinquencies and defaults by year-end.
Citi’s CFO Mark Mason pointed out that the troubling indicators are primarily affecting lower-income consumers, who have seen a reduction in savings since the pandemic began. He noted that only the highest income households have maintained their savings levels.
The Federal Reserve has kept interest rates at a 23-year high of between 5.25% and 5.5% as it monitors inflation trends before deciding on future rate adjustments.
Despite preparing for a rise in defaults later this year, experts believe that current default rates do not indicate a looming consumer crisis. Mulberry highlighted a contrast between homeowners and renters, explaining that many homeowners locked in low mortgage rates during the pandemic and are generally less affected by rising costs, whereas renters have seen their financial situation strained significantly.
Overall, the latest earnings reports suggest stability in the banking sector, with robust revenues and profits indicating a sound financial system. However, experts warn that prolonged high interest rates could increase stress in the market.