Amidst interest rates that have reached their highest levels in over twenty years and persistent inflation affecting consumers, major banks are bracing for increased risks associated with their lending practices.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their reserves for credit losses compared to the previous quarter. These reserves serve as a financial safeguard against potential losses stemming from credit risk, including overdue or bad debts and loans, notably in commercial real estate.
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 surged to $21.8 billion by the end of the quarter, more than tripling its previous quarter’s reserve, and Wells Fargo provisioned $1.24 billion.
These provisions indicate that banks are preparing for a more challenging economic landscape, where both secured and unsecured loans may incur larger losses. A recent report from the New York Fed highlighted that Americans collectively owe $17.7 trillion in consumer loans, student loans, and mortgages.
Furthermore, the rise in credit card issuance and delinquency rates reflects growing reliance on credit as pandemic-era savings diminish. Credit card balances reached $1.02 trillion in the first quarter, marking the second consecutive quarter where total cardholder balances surpassed the trillion-dollar mark, as reported by TransUnion. Additionally, the commercial real estate sector remains on shaky ground.
Analysts suggest that banks are still navigating the aftermath of the COVID-19 pandemic, particularly in terms of consumer financial health, largely due to the stimulus measures that were implemented.
However, challenges for banks are anticipated in the coming months. Analysts emphasize that current provisions are not solely based on recent credit quality, but rather on banks’ expectations of future developments.
As economic growth slows, a higher unemployment rate is forecasted along with anticipated interest rate cuts in September and December. This scenario could lead to an increase in delinquencies and defaults as the year progresses.
Citigroup’s CFO noted that warning signs are particularly evident among lower-income consumers, whose savings have diminished significantly since the pandemic began.
While the overall U.S. consumer remains resilient, there is a notable divergence in financial behavior based on income levels and credit scores. The data show that only high-income individuals have managed to increase their savings since early 2019, while lower-income earners are encountering more difficulties, exacerbated by inflation and rising interest rates.
The Federal Reserve has maintained interest rates at a peak of 5.25-5.5% while awaiting inflation to stabilize towards its 2% target before possibly executing the much-anticipated rate reductions.
Despite banks preparing for potential defaults later this year, the current rate of defaults does not indicate a crisis for consumers. Analysts are particularly observing the differences between homeowners and renters regarding their financial situations.
While interest rates have increased significantly, homeowners benefitted from locking in low fixed rates, sparing them from immediate financial strain. In contrast, renters are facing high rental prices that have surged over 30% nationwide since 2019, along with grocery price increases of 25%, creating significant pressure on their budgets.
In summary, the latest earnings reports reveal no alarming new trends in asset quality. Strong revenues and profits suggest a healthy banking sector, although prolonged high interest rates could lead to increased pressure in the financial system.