With interest rates reaching their highest levels in over two decades and inflation impacting consumers, major banks are gearing up to navigate potential challenges linked 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 reserves set aside to cover potential losses from credit risks, including delinquent debts and commercial real estate loans.
JPMorgan added $3.05 billion to its provision for credit losses in the second quarter, while Bank of America allocated $1.5 billion. Citigroup reported a total of $21.8 billion in allowances for credit losses, more than tripling its reserves from the prior quarter. Wells Fargo set aside $1.24 billion.
These increased provisions indicate that banks are preparing for a more uncertain environment, where both secured and unsecured loans could lead to significant losses. The New York Fed recently reported that U.S. households owe a total of $17.7 trillion in consumer loans, student loans, and mortgages.
The increase in credit card issuance and rising delinquency rates reflect a growing reliance on credit as consumers deplete their pandemic-era savings. According to TransUnion, credit card balances reached a staggering $1.02 trillion in the first quarter, marking the second consecutive quarter that total cardholder balances surpassed the trillion-dollar mark. Additionally, the commercial real estate sector remains unstable.
“We’re still recovering from the COVID era, especially regarding banking and consumer health, which benefited greatly from stimulus aid,” said Brian Mulberry, a client portfolio manager at Zacks Investment Management.
However, challenges for banks may arise in the coming months. Mark Narron, a senior director at Fitch Ratings’ Financial Institutions Group, emphasized that quarterly provisions reflect banks’ future expectations rather than past credit quality.
Narron noted that banks are foreseeing slowing economic growth, a rise in unemployment, and potential interest rate cuts later this year, which could lead to increased delinquency and defaults as the year ends.
Citigroup’s CFO Mark Mason highlighted that while the overall U.S. consumer remains resilient, disparities exist in spending and savings among different income levels. “Only the highest income quartile has retained their savings since 2019, while lower-income consumers are struggling more due to rising inflation and interest rates,” he explained.
The Federal Reserve is maintaining interest rates at a 23-year high of 5.25-5.5%, waiting for inflation to stabilize toward its 2% target before implementing anticipated rate cuts.
Despite preparations for potential defaults in the latter part of the year, Mulberry stated that current default rates do not indicate an impending consumer crisis. He is particularly observing the contrast between homeowners and renters during the pandemic. While homeowners secured low fixed rates on their debt and are less affected, renters face challenges due to rising rental prices that have outpaced wage growth.
Current earnings reports suggest that there are no new issues regarding asset quality. The banking sector is seeing strong revenues, profits, and stable net interest income, signifying ongoing health within the industry.
“There are encouraging signs within the banking sector, which offers relief indicating the financial system remains robust at this time,” Mulberry concluded. Nevertheless, he cautioned that as long as interest rates remain elevated, the stress on consumers and the banking sector will persist.