As interest rates remain at their highest levels in over 20 years and inflation continues to pressure consumers, major banks are bracing for increased risks associated with their lending activities.
In the second quarter of this year, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses compared to the previous quarter. These provisions represent funds that financial institutions allocate to cover potential losses stemming from credit risks, such as delinquent debts and various types of loans, including commercial real estate (CRE) loans.
JPMorgan set aside $3.05 billion for credit losses during the second quarter, while Bank of America allocated $1.5 billion. Citigroup’s total for credit loss allowances reached $21.8 billion by the end of the quarter, significantly more than its previous provision. Wells Fargo reported provisions of $1.24 billion.
These enhanced provisions indicate that banks are preparing for a more challenging lending environment, where both secured and unsecured loans may lead to greater losses. According to a recent analysis from the New York Federal Reserve, American households owe a staggering $17.7 trillion in consumer loans, student loans, and mortgages.
Credit card issuance is increasing, along with rising delinquency rates, as many individuals are depleting their pandemic-era savings and becoming more reliant on credit. Credit card balances climbed to $1.02 trillion in the first quarter, marking the second consecutive quarter that total cardholder balances surpassed the trillion-dollar threshold, according to TransUnion. Additionally, the commercial real estate sector remains vulnerable.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, explained that the current banking landscape is still recovering from the impacts of the COVID-19 pandemic, particularly regarding consumer financial health, which had benefitted from significant stimulus efforts.
According to Mark Narron, a senior director at Fitch Ratings, the credit quality reflected in banks’ quarterly provisions does not solely indicate recent performance but rather their expectations for the future. He noted a shift from a historical approach, where rising loan defaults prompted increased provisions, to a system where macroeconomic forecasts significantly influence provisioning decisions.
Currently, banks anticipate slower economic growth, rising unemployment, and potential interest rate cuts in September and December, which could exacerbate delinquencies and defaults as the year progresses.
Citi’s CFO, Mark Mason, highlighted that the troubling trends are primarily evident among lower-income consumers, who have seen their savings dwindle post-pandemic. He remarked on a disparity among consumers, noting that only those in the highest income quartile had increased savings since early 2019.
Despite the anticipated rise in defaults, experts like Mulberry assert that current trends do not indicate a full-blown consumer crisis. He pointed out the differences between homeowners, who often secured low fixed mortgage rates, and renters, who are struggling with significant rent increases—over 30% nationwide since 2019—while wage growth has not kept pace.
For the moment, analysts suggest that the latest earnings reports do not signify any alarming changes in asset quality. Overall, robust revenues, profits, and net interest income signal a banking sector that remains stable and healthy, even amidst potential stress due to sustained high interest rates.