Amid rising interest rates that are at their highest in over 20 years and persistent inflation affecting consumers, major banks are bracing for potential challenges stemming from their lending practices.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their provisions for credit losses, a reflection of their strategy to set aside funds to mitigate potential losses from delinquent debts and risky loans, including those related to commercial real estate (CRE).
JPMorgan recorded a provision for credit losses amounting to $3.05 billion during the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s credit losses totaled $21.8 billion, marking a significant increase compared to the previous quarter, and Wells Fargo allocated $1.24 billion for this purpose.
These heightened reserves signal that banks are preparing for a more volatile environment, anticipating greater losses from both secured and unsecured loans. A recent report from the New York Federal Reserve revealed that total household debt in the U.S. has reached $17.7 trillion, encompassing consumer loans, student loans, and mortgages.
Additionally, there has been an increase in credit card issuance and delinquency rates as consumers rely more on credit due to depleting pandemic savings. According to TransUnion, total credit card balances surpassed $1 trillion in the first quarter for the second consecutive quarter. The situation regarding CRE loans remains precarious.
Experts note that the lingering effects of the COVID-19 pandemic and the government’s stimulus measures have affected consumer health. Brian Mulberry, a portfolio manager at Zacks Investment Management, emphasized the delayed impact that banks might face.
Mark Narron from Fitch Ratings stated that the provisions recorded by banks do not necessarily indicate immediate credit quality issues but rather reflect predicted future challenges. He noted that current economic forecasts suggest a slowdown in growth, higher unemployment rates, and anticipated interest rate cuts later this year, which could lead to increased delinquencies and defaults.
Citi’s CFO, Mark Mason, highlighted that the concerning trends tend to affect lower-income consumers, who have seen their savings diminish since the pandemic. He noted a disparity in the financial health of different income brackets, with those in the highest income quartile maintaining their savings, while lower-FICO score customers struggle with payment rates.
The Federal Reserve has maintained interest rates between 5.25% to 5.5% as it monitors inflation measures in relation to its target of 2%.
Despite preparations for potential defaults, analysts suggest that a consumer crisis has not yet emerged. Mulberry pointed out that homeowners who locked in low fixed rates during the pandemic are less impacted by rising rates compared to renters, who have faced increasing rental costs amid stagnant wage growth.
Overall, the latest earnings reports indicate no significant new issues in asset quality. Analysts noted strong revenues, profits, and robust net interest income as signs of a resilient banking sector, although ongoing high interest rates could lead to increased stress in the future.