As interest rates reach levels not seen in over 20 years and inflation continues to impact consumers, major banking institutions are preparing for potential risks associated with their lending activities.
In the second quarter of the year, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their provisions for credit losses compared to the previous quarter. These provisions represent the funds that banks set aside to mitigate future losses from credit risks, such as bad debts or delinquent loans.
JPMorgan allocated $3.05 billion for credit losses during the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses rose to $21.8 billion, more than tripling their reserves from the prior quarter. Wells Fargo reported provisions of $1.24 billion.
These adjustments indicate that banks are preparing for a challenging economic environment where both secured and unsecured loans could lead to greater losses. The New York Federal Reserve recently reported that American households carry a total debt of $17.7 trillion, encompassing consumer loans, student loans, and mortgages.
Credit card issuance and delinquency rates are increasing as consumers deplete their pandemic savings and rely more heavily on credit. According to TransUnion, credit card balances reached $1.02 trillion in the first quarter of the year, marking the second consecutive quarter with balances surpassing a trillion dollars. Commercial real estate also remains a significant concern.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, emphasized that the effects of the COVID-19 pandemic, combined with government stimulus, continue to influence consumer behavior and banking stability.
However, any challenges faced by banks may manifest in the coming months. Mark Narron, a senior director at Fitch Ratings, pointed out that current provisions reflect banks’ expectations for the future rather than past credit quality.
With forecasts of slowing economic growth, rising unemployment, and anticipated interest rate cuts in September and December, banks may face increasing delinquency and default rates as the year progresses.
Citigroup’s chief financial officer, Mark Mason, observed that the warning signs are primarily evident among lower-income consumers, whose savings have dwindled since the pandemic. He noted a significant performance gap among consumers, stating that only the highest income quartile has managed to retain more savings than they had at the beginning of 2019.
The Federal Reserve maintains interest rates at a 23-year high of 5.25% to 5.5%, awaiting a stabilization of inflation measures before proceeding with anticipated rate cuts.
Despite banks bracing for higher default rates later in the year, Mulberry indicated that current default levels do not signal an impending consumer crisis. He remarked on the contrast between homeowners, who benefited from low fixed rates, and renters facing escalating costs.
Nationally, rent has increased by over 30% since 2019, while grocery prices have risen by 25%, placing significant financial pressure on renters who have not been able to secure low rates.
Overall, the recent earnings reports suggest stability within the banking sector, indicating that asset quality remains consistent. Strong revenues and net interest income are signs of a resilient banking industry.
Mulberry concluded by stating that while the banking sector shows signs of strength, the ongoing high interest rates could lead to increased stress over time.