Major banks are bracing for potential risks associated with their lending practices as interest rates remain at their highest levels in over two decades and inflation continues to pressure consumers. 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 act as a financial buffer against potential losses due to credit risks, including delinquent debts and issues in lending, such as commercial real estate loans.
Specifically, JPMorgan set aside $3.05 billion for credit losses, Bank of America allocated $1.5 billion, Citigroup’s allowance surged to $21.8 billion, more than tripling its reserve from the prior quarter, and Wells Fargo’s provisions reached $1.24 billion. This accumulation of reserves indicates that banks are preparing for a challenging environment in which both secured and unsecured loans may lead to greater losses.
A recent New York Federal Reserve analysis revealed that total household debt in the U.S. has reached $17.7 trillion, encompassing consumer loans, student loans, and mortgages. Additionally, the issuance of credit cards has increased, along with delinquency rates, as many consumers are depleting their pandemic-era savings and relying more heavily on credit. Credit card balances surpassed $1 trillion for the second consecutive quarter this year, highlighting the rising financial pressures on consumers.
Experts point out that while the banking sector is currently navigating post-pandemic challenges, several red flags are emerging. Mark Narron from Fitch Ratings noted that the provisions banks report reflect their expectations for the future rather than the recent past. He indicated that banks anticipate slowing economic growth, potential unemployment increases, and possible interest rate cuts later in the year, which could lead to more delinquencies and defaults.
Citi’s CFO, Mark Mason, expressed concerns particularly for lower-income consumers, who have seen significant declines in their savings since the pandemic. He noted a notable disparity, observing that only the highest income quartile has maintained their savings since 2019, while lower-income consumers are facing increasing difficulties due to high inflation and interest rates.
The Federal Reserve has maintained interest rates at a 23-year peak of 5.25-5.5% while looking for inflation measures to align with a 2% target prior to making anticipated cuts. Despite the banks’ preparations for possible defaults, there has not yet been a significant spike in these rates, indicating no immediate consumer crisis, as noted by Brian Mulberry from Zacks Investment Management.
Mulberry drew a distinction between homeowners and renters, explaining that while interest rates have surged, homeowners who locked in low fixed rates on their debt are less affected. In contrast, renters have faced over 30% increases in rent since 2019, with grocery costs rising by 25%, leading to greater financial strain.
Ultimately, the latest earnings reports from the banks revealed nothing alarming in terms of asset quality, with strong revenues and profits indicating a resilient banking sector. Experts believe that while the financial system remains robust, sustained high interest rates could lead to increased stress in the future.