With interest rates at their highest in over 20 years and inflation impacting consumers, major banks are bracing for increased lending risks.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all raised their provisions for credit losses compared to the previous quarter. These provisions are funds set aside to address potential losses from credit risks, including delinquent debt and commercial real estate loans.
JPMorgan allocated $3.05 billion for credit losses; Bank of America set aside $1.5 billion; Citigroup’s credit loss allowance reached $21.8 billion, significantly increasing from the previous quarter; while Wells Fargo’s provisions amounted to $1.24 billion.
These additional reserves indicate that banks are preparing for a more challenging environment, which could lead to larger losses from both secured and unsecured loans. An analysis by the New York Fed revealed that Americans collectively owe $17.7 trillion in consumer loans, student loans, and mortgages.
Credit card issuance and delinquency rates are also rising, as consumers deplete their pandemic-era savings and increasingly rely on credit. In the first quarter, credit card balances surpassed $1.02 trillion, marking the second consecutive quarter that total cardholder balances exceeded the trillion-dollar benchmark, according to TransUnion. The commercial real estate sector remains particularly vulnerable.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, remarked on the impact of the COVID-19 stimulus on consumer health and banking.
Future challenges for banks may stem from a changing economic landscape. Mark Narron, a senior director at Fitch Ratings, explained that the current provisions do not necessarily reflect past credit quality but are based on banks’ outlooks for the future.
Narron mentioned that banks are anticipating slowing economic growth, an increase in unemployment rates, and two interest rate cuts in September and December, which could lead to more delinquencies and defaults as the year ends.
Citi’s CFO, Mark Mason, pointed out that emerging concerns seem concentrated among lower-income consumers who have seen their savings diminish since the pandemic. He noted a disparity in savings across income brackets, stating that only the highest-income quartile has more savings than pre-2019 levels, while lower FICO score customers face steeper declines in payment rates.
The Federal Reserve has maintained interest rates at a 23-year high of 5.25-5.5% as it awaits inflation to stabilize towards its 2% target before implementing anticipated rate cuts.
Despite preparations for increased defaults, Mulberry stated that current default rates do not indicate a consumer crisis. He highlighted a divide between homeowners who benefit from locked-in low rates and renters facing rising rents, noting that rental prices have surged over 30% nationwide since 2019, compared to a 25% increase in grocery costs.
Ultimately, despite some reservations, the latest earnings reports revealed no new issues regarding asset quality. Strong revenues, profits, and net interest income suggest the banking sector remains robust. Mulberry emphasized the importance of monitoring the situation closely as prolonged high interest rates may induce more stress in the system.