The nation’s major banks are bracing for increased risks in lending as interest rates remain at their highest levels in over two decades and inflation continues to impact consumers significantly. In the second quarter of this year, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their provisions for credit losses compared to the previous quarter. These provisions are designed to cover potential losses from credit risks, including defaults on loans.
JPMorgan allocated $3.05 billion for credit losses, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses surged to $21.8 billion, more than tripling its reserves from the prior quarter, and Wells Fargo recorded $1.24 billion in provisions.
This increase indicates that banks are preparing for a more challenging environment, where both secured and unsecured loans may result in larger losses. A recent report from the New York Federal Reserve highlighted that American households now collectively owe $17.7 trillion in consumer loans, student loans, and mortgages.
Additionally, the issuance of credit cards and the rates of delinquency are rising as consumers exhaust their pandemic-era savings and increasingly rely on credit. Credit card balances reached $1.02 trillion in the first quarter, marking the second consecutive quarter that totals exceeded one trillion dollars, according to TransUnion. The commercial real estate sector is also showing signs of distress.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted that the ongoing recovery from the COVID era heavily relied on the stimulus provided to consumers. He stressed that banks are not currently facing significant issues but are forecasting potential challenges ahead.
Mark Narron, a senior director at Fitch Ratings, explained that the provisions reported by banks may not necessarily reflect immediate credit quality but are instead based on expected future risks. Consequently, the macroeconomic outlook has become a key driver for provisioning decisions.
Banks anticipate slower economic growth, potential increases in unemployment, and two expected interest rate cuts later this year. This scenario raises concerns about a rise in delinquencies and defaults as the year concludes.
Citi’s Chief Financial Officer Mark Mason pointed out that warning signs are primarily seen among lower-income consumers, who have diminished savings since the pandemic. Although the overall U.S. consumer remains resilient, there is a noticeable disparity in financial behavior across different income groups and credit scores.
The Federal Reserve’s interest rates are currently maintained at a 23-year peak of 5.25-5.5%, with plans for cuts dependent on inflation metrics stabilizing toward the 2% target.
Despite preparations for potential defaults in the latter part of the year, Mulberry noted that current default rates do not indicate an imminent consumer crisis. He highlighted the distinction between homeowners—who benefited from locking in low fixed-rate loans—and renters, who have been significantly affected by rising rental rates and living costs.
With rents climbing over 30% nationally from 2019 to 2023 and grocery prices increasing by 25%, those who did not secure low borrowing rates are feeling the greatest financial pressure.
Overall, recent earnings reports did not reveal new concerns regarding asset quality. Positive indicators such as strong revenues, profits, and net interest income suggest that the banking sector remains robust. Mulberry stated that while there is strength in the banking system, the prolonged high-interest rates could exert additional stress in the future.