Amid the backdrop of interest rates at their highest levels in over two decades and ongoing inflation pressures, major banks are bracing for potential 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. This amount, set aside by financial institutions, aims to mitigate potential losses stemming from delinquent debts and high-risk loans, particularly in commercial real estate.
JPMorgan allocated $3.05 billion for credit losses, while Bank of America designated $1.5 billion. Citigroup’s allowance reached $21.8 billion by the quarter’s end, more than tripling its previous reserve, and Wells Fargo set aside $1.24 billion.
These heightened provisions indicate that banks are preparing for a more challenging economic landscape where both secured and unsecured loans may result in substantial losses. According to the New York Fed, U.S. households carry a staggering $17.7 trillion in consumer, student, and mortgage debt.
Rising credit card issuances and delinquency rates also signal further financial strain as consumers deplete their pandemic savings. Credit card balances surpassed $1 trillion for the second consecutive quarter in early 2023, as reported by TransUnion. The commercial real estate sector remains under scrutiny as well.
Brian Mulberry, a portfolio manager at Zacks Investment Management, commented on the ongoing post-COVID recovery and the impact of government stimulus on consumer health.
Experts warn, however, that challenges for banks may surface in the near future. Mark Narron, a senior director at Fitch Ratings, emphasized that current provisions reflect banks’ future expectations rather than recent credit quality.
As banks foresee slowing economic growth, an uptick in unemployment, and anticipated interest rate cuts in September and December, delinquencies and defaults may rise as the year progresses.
Citigroup’s CFO Mark Mason highlighted that financial difficulties appear particularly concentrated among lower-income consumers, who have seen their savings diminish since the pandemic.
He stated that only the highest income segment has managed to save more compared to early 2019, with customers having FICO scores above 740 leading spending growth. In contrast, those in lower FICO brackets are experiencing increased borrowing and declining payment rates due to financial pressures from inflation and high interest rates.
The Federal Reserve maintains interest rates at a 23-year high of 5.25-5.5%, awaiting stabilization of inflation towards its 2% target before implementing anticipated rate cuts.
Despite banks preparing for potential defaults, Mulberry notes that current default rates do not indicate a widespread consumer crisis. He is particularly observing the differences in financial experiences between homeowners and renters during this period.
While homeowners have locked in low fixed rates, renters are facing significant challenges, with national rents rising over 30% from 2019 to 2023 and grocery costs increasing by 25%, straining monthly budgets for those without the advantage of stabilized rates.
Currently, analysts report that the latest earnings did not reveal any concerning trends in asset quality, with strong revenues and profits reflecting a robust banking sector. Mulberry concluded that while the financial system shows resilience, ongoing high interest rates may introduce additional stress moving forward.