With interest rates at their highest in over two decades and persistent inflation impacting consumers, major banks are gearing up for increased risks related 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 reserved funds set aside to address potential losses from credit risk, including delinquent debts and loans, particularly in the commercial real estate sector.
JPMorgan set aside $3.05 billion for credit losses in the second quarter, while Bank of America allocated $1.5 billion. Citigroup’s allowance for credit losses rose to $21.8 billion by the quarter’s end, marking more than a threefold increase from the previous quarter. Wells Fargo reported provisions totaling $1.24 billion.
The increased reserves suggest that these banks are preparing for a more challenging lending landscape where both secured and unsecured loans may lead to greater losses. A recent analysis by the New York Federal Reserve revealed that American consumers owe a total of $17.7 trillion across various loans, including consumer, student, and mortgage loans.
There is also a rise in credit card issuance and delinquency rates, as individuals begin to exhaust their pandemic-era savings and turn to credit more frequently. Credit card balances reached $1.02 trillion in the first quarter, marking the second consecutive quarter where total cardholder balances surpassed the trillion-dollar threshold. Additionally, the commercial real estate market remains unstable.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, commented on the situation, stating, “We’re still coming out of this COVID era, particularly regarding the banking sector and consumer health, largely due to the stimulus provided to consumers.”
Experts note that any issues for banks may emerge in the upcoming months. Mark Narron, a senior director at Fitch Ratings, explained that quarterly provisions do not necessarily reflect recent credit quality but instead indicate banks’ expectations for the future.
Narron pointed out the shift from a historically reactive approach—where provisions increased as loans began to default—to one driven by macroeconomic forecasts. Currently, banks anticipate slower economic growth, rising unemployment, and potential interest rate cuts in the coming months, which could lead to even more delinquencies and defaults as the year concludes.
Citi Chief Financial Officer Mark Mason highlighted that concerns are mainly concentrated among lower-income consumers, who have seen their savings diminish since the pandemic. He emphasized the disparity in consumer behavior based on income levels, noting that only the wealthiest quartile has managed to maintain more savings since 2019. Customers with high credit scores are driving spending growth, while those with lower scores are facing greater difficulties.
While the Federal Reserve has maintained interest rates at a 23-year high of 5.25-5.5%, it is waiting for inflation to stabilize at its 2% target before implementing expected rate cuts.
Despite banks bracing for higher default rates later this year, the current rise in defaults is not yet indicative of a consumer crisis, Mulberry noted. He is particularly interested in the contrast between homeowners and renters during this period. Homeowners, having secured low fixed rates, are largely unaffected by rising rates, unlike renters who have seen significant increases in housing costs.
Overall, the latest earnings reports showed no major concerns regarding asset quality, indicating a resilient banking sector. Narron stated that while there may not have been significant surprises this quarter, the figures reflect a relatively healthy financial system. Mulberry expressed cautious optimism, recognizing the strength within the banking sector but warning that sustained high interest rates could lead to increased economic stress.