Amid high interest rates and persistent inflation, major banks are bracing for potential risks in their lending practices.
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 serve as a financial cushion against expected losses from various lending risks, including delinquent debts and commercial real estate loans.
Specifically, JPMorgan allocated $3.05 billion towards credit loss provisions, while Bank of America set aside $1.5 billion. Citigroup’s credit loss allowance reached $21.8 billion, marking a significant increase from the previous quarter. Wells Fargo reported provisions of $1.24 billion.
These heightened provisions indicate that banks are anticipating a riskier economic landscape, where both secured and unsecured loans may lead to greater losses. According to recent figures from the New York Federal Reserve, Americans are currently facing a staggering total of $17.7 trillion in consumer, student, and mortgage debt.
Credit card usage is also on the rise, reflecting an increase in delinquency rates as many consumers deplete their pandemic savings and increasingly rely on credit. Credit card debt surpassed $1 trillion for the second consecutive quarter earlier this year, as per TransUnion data. Additionally, the commercial real estate sector is still navigating challenges.
Experts point out that the ongoing recovery from the pandemic, particularly in banking and consumer health, has been bolstered by significant stimulus measures. However, banking challenges may arise in the coming months.
Mark Narron from Fitch Ratings remarked that the most recent provisions do not solely mirror the credit quality from the past three months; instead, they are shaped by banks’ future expectations. He noted a shift from a reactive to a proactive approach concerning loan delinquencies and defaults driven by macroeconomic forecasts.
Currently, banks are predicting slower economic growth, higher unemployment rates, and two anticipated interest rate cuts later this year. This could lead to a rise in delinquencies and defaults as the year concludes.
Citi’s CFO, Mark Mason, indicated that warning signs are most prevalent among lower-income consumers, whose savings have diminished post-pandemic. He highlighted a divide in financial resilience among U.S. consumers, where only high-income groups have seen an increase in savings since 2019, while those with lower credit scores are facing payment difficulties due to high inflation and interest rates.
Despite these concerns, defaults have not yet surged to levels that suggest a consumer crisis, as noted by Brian Mulberry from Zacks Investment Management. He observed that homeowners who locked in low fixed-rate mortgages during the pandemic are largely insulated from the financial stress that renters are experiencing now.
With rental costs up significantly and grocery prices also climbing, renters who didn’t benefit from low mortgage rates are facing considerable financial pressure.
Overall, the latest earnings reports signal stability within the banking sector, with strong revenues and net interest income providing assurance. Mulberry highlighted that while the banking system appears stable, ongoing high interest rates could induce further stress in the future.