As interest rates reach levels not seen in over two decades and inflation continues to pressure consumers, major banks are bracing for increased risks in their lending activities.
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 are reserves set aside to mitigate potential losses from credit risks, which include delinquent debt and various types of loans, such as commercial real estate loans.
JPMorgan allocated $3.05 billion for credit losses in the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses reached $21.8 billion by the end of the quarter, significantly more than previous reserves, and Wells Fargo reported provisions amounting to $1.24 billion.
These increased reserves indicate that banks are preparing for a more challenging financial environment that could lead to larger losses from both secured and unsecured lending. A recent study by the New York Fed showed that Americans currently owe $17.7 trillion in consumer loans, student loans, and mortgages.
Additionally, both credit card issuance and delinquency rates are climbing as people deplete their pandemic savings and increasingly rely on credit. Credit card balances exceeded $1 trillion for the second consecutive quarter this year, according to TransUnion. Commercial real estate also remains a point of concern.
Experts note that the financial landscape continues to evolve in the aftermath of the COVID pandemic. Brian Mulberry, a client portfolio manager at Zacks Investment Management, pointed out that the economic stimulus provided to consumers plays a significant role in their current financial health.
Looking ahead, banks are anticipating further challenges. Mark Narron from Fitch Ratings emphasized that the provisions reported do not necessarily reflect past credit quality but indicate banks’ expectations for future trends.
The near-term outlook suggests slowing economic growth, a potential increase in the unemployment rate, and expected interest rate cuts in September and December, which could lead to increased delinquencies and defaults.
Mark Mason, the chief financial officer at Citigroup, highlighted that the concerns regarding credit quality are particularly pronounced among lower-income consumers, who have seen their savings diminish since the pandemic.
While the overall U.S. consumer remains resilient, a more critical divide is apparent across various income levels. Mason noted that only the highest income quartile has increased their savings since the beginning of 2019, with higher FICO score customers driving spending growth and maintaining consistent payment rates. In contrast, those in lower FICO bands are experiencing declining payment rates and borrowing more due to the impact of high inflation and interest rates.
With the Federal Reserve keeping interest rates at a 23-year high, it waits for inflation to stabilize before implementing anticipated rate cuts.
Despite preparations for potential defaults later in the year, experts like Mulberry indicate that current default rates do not yet signal a consumer crisis. He pointed out that homeowners who locked in low fixed rates during the pandemic are less affected by rising interest rates compared to renters, who are facing significant financial strain due to soaring rents and other costs.
In conclusion, the latest earnings reports reveal no new concerns regarding asset quality in the banking sector. Strong revenues, profits, and net interest income underscore the resilience of the banking institutions. Mulberry noted that the banking sector remains robust but warns that sustained high interest rates may put increasing pressure on the financial landscape.