Amid rising interest rates, which are now at their highest in over two decades, and persistent inflation impacting consumers, major banks are bracing for greater risks in 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 serve as a financial cushion for potential losses due to credit risks, including delinquent debts and loans like commercial real estate loans.
JPMorgan allocated $3.05 billion for credit losses in the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses reached $21.8 billion, reflecting a significant increase from earlier in the year, and Wells Fargo provisioned $1.24 billion. The accumulation of these reserves indicates that banks are preparing for a more challenging economic environment, where both secured and unsecured loans might lead to higher losses.
A recent analysis by the New York Federal Reserve highlighted that Americans collectively owe $17.7 trillion in consumer loans, student loans, and mortgages. Additionally, credit card debt is on the rise, with balances exceeding $1 trillion for the second consecutive quarter, as consumers begin to deplete their pandemic-era savings.
Brian Mulberry, a portfolio manager at Zacks Investment Management, pointed out the lingering effects of the COVID-19 pandemic on banking and consumer health, primarily driven by governmental stimulus measures. He emphasized that the current provisions reflect banks’ expectations for future credit quality, which could be affected by predicted economic slowdowns, higher unemployment rates, and potential interest rate cuts later this year.
Mark Mason, Citigroup’s CFO, noted concerns about the financial behavior of lower-income consumers, who have seen their savings diminish since the pandemic. He mentioned that only the wealthiest quartile of consumers currently has more savings than they did in 2019. This group, with FICO scores over 740, is driving spending growth and maintaining high payment rates, while those in lower FICO bands are struggling with increased borrowing and declining payment rates due to the financial strain from high inflation and interest rates.
The Federal Reserve has maintained interest rates at a level of 5.25%-5.5% in an attempt to stabilize inflation towards its target of 2%, delaying anticipated rate cuts. Despite preparations for potential increased defaults, analysts suggest that current default rates do not indicate an impending consumer crisis. Mulberry highlighted a distinction between homeowners, who locked in low fixed rates during the pandemic, and renters, who are now facing significant rental increases and rising living costs.
Overall, despite the challenges, the latest earnings reports indicate stability within the banking sector, with strong revenues and net interest income revealing resilience. Observers are closely monitoring the economic landscape, particularly as extended periods of high interest rates could lead to increased stress for consumers.