Amid high interest rates and inflation impacting consumers, major banks are gearing up for increased risks in their lending activities.
In the second quarter, major financial institutions such as JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo reported a rise in their provisions for potential credit losses. These provisions are funds set aside to mitigate potential losses from credit-related issues, including delinquent debt and commercial real estate loans.
JPMorgan allocated $3.05 billion for credit loss provisions in the second quarter, while Bank of America reported $1.5 billion. Citigroup increased its allowance for credit losses to $21.8 billion, more than tripling its reserves from the previous quarter. Wells Fargo’s provisions reached $1.24 billion.
These provisions indicate that banks are preparing for a more challenging lending environment, with concerns over both secured and unsecured loans potentially leading to larger losses. According to a recent report from the New York Fed, American household debt totals approximately $17.7 trillion across various loan categories, including consumer, student, and mortgage loans.
The issuance and delinquency rates of credit cards are rising, as consumers deplete their pandemic-era savings and turn increasingly to credit. Credit card balances hit $1.02 trillion in the first quarter, marking the second consecutive quarter where total cardholder balances surpassed the trillion-dollar threshold. Commercial real estate also remains in a vulnerable position.
As Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted, the effects of the COVID-19 pandemic still linger, particularly in terms of consumer health, largely influenced by government stimulus measures.
Experts warn that challenges for banks may loom in the near future. Mark Narron, a senior director at Fitch Ratings, explained that current provisions reflect banks’ expectations for future credit quality rather than recent performance.
In the short term, banks anticipate slowing economic growth, rising unemployment, and potential interest rate cuts in September and December, which could lead to more delinquencies and defaults as the year concludes.
Citi Chief Financial Officer Mark Mason highlighted that warning signs are particularly evident among lower-income consumers, who have seen their savings diminish in the aftermath of the pandemic.
Mason pointed out that while the overall U.S. consumer remains resilient, significant differences exist among income and credit score levels. Notably, only top-income quartile consumers have seen an increase in savings since 2019. In contrast, borrowers with lower FICO scores are experiencing a decline in payment rates and an increase in borrowing due to the pressures of inflation and high interest rates.
Currently, the Federal Reserve maintains interest rates at a 23-year high of 5.25-5.5%, awaiting stabilization in inflation metrics towards its 2% goal before considering rate cuts.
Despite banks bracing for more defaults later this year, the rate of defaults is not yet signaling a consumer crisis, according to Mulberry. He emphasized the distinction between homeowners and renters during the pandemic, noting that homeowners with low fixed-rate mortgages are not feeling the same financial strain as renters facing soaring rental costs.
Rental prices have surged over 30% nationwide from 2019 to 2023, coupled with a 25% rise in grocery costs, putting significant pressure on renters who did not secure low rates.
Overall, the recent earnings reports suggest that there are no new concerns regarding asset quality. The banking sector is showing strong revenues, profits, and solid net interest income, indicating ongoing resilience.
Mulberry concluded by stating that while the banking sector remains robust, prolonged high interest rates could lead to increased stress in the future.