Amidst interest rates hitting a two-decade high 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 provisions for credit losses compared to the previous quarter. These provisions represent the funds set aside by financial institutions to cover potential losses arising from credit risks, which include delinquencies and bad debts.
JPMorgan allocated $3.05 billion for credit loss provisions 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, marking more than a threefold increase from the previous quarter, and Wells Fargo added $1.24 billion in provisions.
These increases indicate that banks are preparing for a riskier economic landscape where both secured and unsecured loans could lead to more significant losses. A recent analysis by the New York Fed revealed that Americans collectively owe $17.7 trillion in consumer loans, student loans, and mortgages.
Credit card issuance and delinquency rates have also risen as consumers increasingly rely on credit due to dwindling savings from the pandemic era. By the first quarter of this year, credit card balances surpassed $1 trillion for the second consecutive quarter, according to TransUnion.
Experts suggest that any forthcoming issues for banks will emerge in the coming months. Mark Narron, a senior director at Fitch Ratings, stated that current provisions reflect banks’ expectations regarding future challenges rather than their historical credit quality.
According to Narron, banks anticipate slowing economic growth, a rise in unemployment, and potential interest rate cuts later this year, which could lead to increased delinquencies and defaults.
Citi’s Chief Financial Officer, Mark Mason, pointed out that troubling trends seem to affect lower-income consumers the most, who have seen their savings decline since the pandemic. While the U.S. consumer is generally resilient, there is a noticeable divide between different income groups.
The Federal Reserve continues to maintain interest rates at a 23-year high of 5.25-5.5%, awaiting signs that inflation is stabilizing closer to its target of 2% before implementing expected rate cuts.
Despite preparing for a potential rise in defaults, experts do not currently see a consumer crisis in the making. Brian Mulberry from Zacks Investment Management noted that homeowners, who locked in low fixed rates during the pandemic, are less affected by rising rates compared to renters facing higher living costs.
The stark contrast in financial strain between homeowners and renters is noteworthy, especially as rental prices have surged by over 30% nationwide since 2019, and grocery prices have climbed by 25%.
Overall, the latest earnings reports indicate stability in the banking sector, with strong revenues and resilient net interest income suggesting a healthy financial system. Mulberry emphasized that despite high interest rates causing stress, the overall structures of banks remain solid at this time.