Major banks are bracing for increased risks in their lending practices as interest rates reach their highest levels in over 20 years and inflation continues to pressure consumers. 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 banks set aside to cover possible losses from credit risks, which can include delinquent loans and bad debt, particularly concerning commercial real estate (CRE).
JPMorgan reported $3.05 billion set aside for credit losses in the second quarter, while Bank of America allocated $1.5 billion. Citigroup increased its allowance for credit losses to $21.8 billion—more than tripling its reserves from the previous quarter—and Wells Fargo’s provisions amounted to $1.24 billion.
These growing reserves indicate that banks are preparing for a riskier economic landscape, where both secured and unsecured loans could result in significant losses. A recent analysis from the New York Federal Reserve revealed that Americans are currently burdened with a total of $17.7 trillion in consumer loans, including student loans and mortgages.
Moreover, credit card issuance is rising alongside increasing delinquency rates as consumers deplete their savings accumulated during the pandemic and lean more on credit. As of the first quarter of this year, credit card balances reached $1.02 trillion, marking the second consecutive quarter where total balances exceeded the trillion-dollar threshold, according to TransUnion. The commercial real estate sector is also under significant strain.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, highlighted the ongoing implications of the COVID era, emphasizing the role of government stimulus during that time.
Mark Narron, a senior director in Fitch Ratings’ Financial Institutions Group, pointed out that the provisions noted each quarter reflect banks’ expectations about future economic conditions rather than past performance. He explained that the current focus has shifted from a traditional approach where poor loan performance would elevate provisions to one driven by macroeconomic forecasts.
Banks are anticipating a slowdown in economic growth, a rise in unemployment, and two interest rate cuts later this year, which could result in more delinquencies and defaults as the year progresses.
Citi’s CFO, Mark Mason, remarked that signs of distress are mainly evident among lower-income consumers, who have seen their savings diminish since the pandemic. He noted that while high-income consumers remain resilient, the lower-income bracket is struggling more significantly with rising inflation and interest rates.
The Federal Reserve has maintained interest rates at historically high levels of 5.25-5.5% while awaiting stabilization in inflation towards the 2% target before proceeding with anticipated rate cuts.
Currently, industry experts believe that defaults have not escalated to levels indicative of a consumer crisis, with Brian Mulberry noting a potential divide between homeowners and renters during the pandemic. Those who secured low fixed-rate mortgages have largely mitigated the financial strain compared to renters facing significant increases in housing costs and rising grocery prices.
Despite the concerns, analysts noted no significant changes in asset quality from the latest earnings reports, highlighting robust revenues and profits within the banking sector. Mulberry indicated that this suggests a solid foundation for the financial system, though he cautioned that prolonged high-interest rates could lead to more strain in the future.