As interest rates remain at their highest levels in over two decades and inflation continues to pressure consumers, major banks are taking precautions against potential risks linked to their lending practices.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their reserves for credit losses compared to the previous quarter. These reserves are funds set aside to mitigate potential losses from credit risks, including defaults on loans and issues within the commercial real estate sector.
JPMorgan allocated $3.05 billion for credit losses in the second quarter, while Bank of America reported $1.5 billion in reserves. Citigroup’s allowance for credit losses reached $21.8 billion, marking a significant increase from the prior quarter, and Wells Fargo designated $1.24 billion for this purpose.
These increased reserves indicate that banks are anticipating a more challenging lending environment, where both secured and unsecured loans could lead to larger losses. An analysis by the New York Federal Reserve found that American households collectively owe $17.7 trillion across various types of consumer debt, including student loans and mortgages.
The issuance of credit cards and the corresponding delinquency rates are also rising as individuals exhaust their pandemic-era savings and turn increasingly to credit. By the first quarter of this year, credit card balances reached $1.02 trillion, marking the second consecutive quarter where totals surpassed the trillion-dollar mark, according to TransUnion. The commercial real estate market remains under significant strain as well.
Brian Mulberry, a portfolio manager at Zacks Investment Management, emphasized the ongoing challenges within the consumer banking sector as the economy continues to recover from the pandemic, primarily due to the stimulus measures implemented.
Experts caution that any challenges for banks may emerge in the upcoming months. Mark Narron, a senior director at Fitch Ratings, noted that the provisions for credit losses reported by banks in a given quarter often reflect future expectations about credit quality rather than past performance.
The outlook for banks includes expectations of slower economic growth, increased unemployment rates, and two anticipated interest rate cuts later this year, which could contribute to rising delinquencies and defaults.
Citigroup’s Chief Financial Officer Mark Mason pointed out that the most significant concerns are concentrated among lower-income consumers, who have seen their savings erode since the pandemic began.
While the overall U.S. consumer appears resilient, there is a notable disparity in financial health across different income levels. Mason revealed that only the top income quartile has managed to maintain higher savings since early 2019, while those with lower credit scores are experiencing increased borrowing and declines in payment rates, heavily affected by inflation and rising interest rates.
The Federal Reserve has maintained interest rates at a 23-year high, waiting for inflation to stabilize at the target of 2% before executing anticipated rate cuts.
Despite banks preparing for a potential uptick in defaults later this year, Mulberry noted that current default rates do not indicate a looming consumer crisis. He is particularly interested in contrasting the financial positions of homeowners with those of renters during this period.
While interest rates have significantly increased, homeowners who secured low fixed rates have not felt substantial pressure, unlike renters who face soaring rental prices and inflation that exceeds wage growth.
For now, analysts observe that the recent earnings reports from banks do not indicate significant changes in asset quality. Strong revenues and profitability suggest that the banking sector remains robust.
Analysts conclude that although there are challenges on the horizon, the structural integrity of the financial system appears sound, even as prolonged high interest rates may introduce additional stress.