As interest rates reach their highest levels in over two decades and inflation continues to pressure consumers, major banks are bracing for increased risks related to their lending practices.
In the second quarter of the year, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses compared to the previous quarter. These provisions represent the funds that banks set aside to cover potential losses from credit risks, including delinquencies and bad debts tied to loans such as commercial real estate (CRE).
JPMorgan set aside $3.05 billion for credit losses, while Bank of America allocated $1.5 billion. Citigroup’s allowance for credit losses reached $21.8 billion at the end of the quarter, more than tripling its reserves from the prior quarter. Wells Fargo’s provisions totaled $1.24 billion.
The buildup in reserves indicates that these financial institutions are preparing for a more challenging economic environment, where both secured and unsecured loans pose potential risks. A recent analysis by the New York Federal Reserve revealed that Americans carry a combined $17.7 trillion in consumer loans, including student loans and mortgages.
Credit card issuance and delinquency rates are on the rise as many Americans deplete their pandemic-era savings and increasingly rely on credit. According to TransUnion, credit card balances hit $1.02 trillion in the first quarter, the second consecutive quarter surpassing the trillion-dollar mark. The commercial real estate sector remains particularly vulnerable.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, emphasized the lingering effects of the COVID-19 era on consumer health, noting the impact of previous stimulus measures on spending.
Experts indicate that any significant banking issues may emerge in the coming months. Mark Narron, a senior director at Fitch Ratings, explained that quarterly provisions reflect banks’ expectations of future credit quality rather than past performance.
Currently, banks are forecasting slower economic growth, an increase in unemployment, and anticipated interest rate cuts later this year, which could lead to higher delinquency and default rates.
Citi’s chief financial officer, Mark Mason, highlighted that the financial struggles appear concentrated among lower-income consumers, whose savings have diminished since the pandemic began. He noted that only the highest-income segment has retained more savings compared to three years ago.
While there are signs of stress, defaults are not rising at levels indicative of a consumer crisis just yet, according to Mulberry. He pointed out the contrast between homeowners, who locked in low fixed rates, and renters facing steep rental costs due to rising market rates.
Overall, this quarter’s earnings reports indicate no significant changes in asset quality. Strong revenues and resilient net interest income point towards ongoing strength in the banking sector. Mulberry reflected on the robustness of the financial system, noting that while the banking sector remains fundamentally sound, enduring high-interest rates could lead to increased stress in the future.