As interest rates remain at their highest levels in over 20 years and inflation continues to pressure consumers, major banks are preparing for increased risks linked to their lending practices.
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 funds set aside by banks to cover potential losses from credit risks, including defaults and problematic debts, particularly in the realm of 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, showing a substantial increase from the previous period, and Wells Fargo reported provisions of $1.24 billion.
These provisions indicate that banks are bracing for a more challenging environment where both secured and unsecured loans could lead to greater losses. According to a recent analysis by the New York Federal Reserve, American households collectively owe $17.7 trillion in consumer loans, student loans, and mortgages.
Additionally, credit card usage and delinquency rates have risen as consumers deplete their pandemic-era savings and increasingly rely on credit. The total credit card debt reached $1.02 trillion in the first quarter of this year, marking the second consecutive quarter that it surpassed the trillion-dollar threshold, as reported by TransUnion. Commercial real estate also remains precariously vulnerable.
The banking sector’s cautious stance reflects concerns about the ongoing impact of the COVID-19 pandemic on consumer financial health, as noted by Brian Mulberry, a portfolio manager at Zacks Investment Management.
Looking ahead, experts suggest that challenges for banks may emerge in the coming months. Mark Narron, a senior director at Fitch Ratings, explained that the current provisions do not necessarily indicate the recent credit quality but rather what banks anticipate for the future.
Banks are now forecasting slower economic growth, a potential rise in unemployment, and predicted interest rate cuts later this year, which could lead to more delinquencies and defaults.
Citi’s chief financial officer, Mark Mason, highlighted that the concerns seem to be primarily affecting lower-income consumers, who have experienced a decline in savings since the pandemic.
While the overall U.S. consumer remains resilient, disparities exist across income levels. Only consumers in the highest income quartile have seen their savings increase since early 2019, while those in lower credit score bands are struggling more due to rising inflation and interest rates.
The Federal Reserve is maintaining interest rates at a 23-year high of 5.25-5.5%, awaiting stabilization in inflation rates to move toward its target of 2%.
Although banks are bracing for increased defaults as the year progresses, current rates of default do not yet suggest an impending consumer crisis, according to Mulberry. He notes differences between mortgage holders and renters during the pandemic, as homeowners locked in low interest rates while renters face significant cost increases.
With national rents rising over 30% and grocery prices increasing by 25% from 2019 to 2023, renters are experiencing greater financial strain compared to homeowners who secured lower fixed rates.
Overall, the latest earnings reports indicated no alarming shifts in asset quality. Strong revenues and profits, along with solid net interest income, suggest a stable banking sector for now. However, Mulberry cautioned that prolonged high-interest rates could lead to more pressure moving forward.