As interest rates reach their highest point in over two decades and inflation continues to pressure consumers, major banks are bracing for increased risks associated with their lending practices.
In the second quarter, prominent banks including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their provisions for credit losses compared to the previous quarter. These provisions serve as a buffer against potential losses from credit risk, including delinquencies and defaults on loans, particularly in the commercial real estate sector.
Specifically, JPMorgan set aside $3.05 billion for credit losses, while Bank of America allocated $1.5 billion. Citigroup’s allowance climbed to $21.8 billion, more than tripling its reserves from the previous quarter, and Wells Fargo’s provisions totaled $1.24 billion.
This increase in provisions indicates that banks are preparing for a riskier lending environment, where both secured and unsecured loans may lead to higher losses. A recent analysis by the New York Federal Reserve revealed that American households owe a staggering $17.7 trillion across various types of consumer debt, including loans and mortgages.
Moreover, credit card issuance is on the rise, along with delinquency rates, as consumers exhaust their savings accumulated during the pandemic and increasingly rely on credit. In the first quarter, credit card balances reached $1.02 trillion, marking the second consecutive quarter that total balances exceeded $1 trillion.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted that the banking industry’s condition is still recovering from the COVID-19 pandemic, primarily due to the consumer stimulus measures implemented during that time.
Experts suggest that any significant issues for banks may manifest in the coming months. Mark Narron, a senior director at Fitch Ratings, stated that the provisions reported by banks reflect expectations for future credit quality rather than past performance.
Currently, banks are forecasting slower economic growth, higher unemployment rates, and the possibility of two interest rate cuts later this year. This situation could potentially lead to increased delinquencies and defaults as the year progresses.
Citi’s chief financial officer, Mark Mason, observed that the concerns are most pronounced among lower-income consumers, who have depleted their savings since the pandemic. Mason indicated that only the highest-income consumers have seen an increase in savings since early 2019, with those in lower FICO score brackets experiencing declines in payment rates and a reliance on credit as inflation and interest rates rise.
The Federal Reserve has maintained interest rates at a 23-year high of 5.25-5.5%, awaiting stabilization of inflation measures to meet its target of 2% before implementing any anticipated rate cuts.
Despite banks preparing for potential defaults, current trends do not indicate a consumer crisis, according to Mulberry. He is particularly monitoring the difference between homeowners and renters, noting that homeowners have locked in low fixed rates while renters are facing significant increases in housing costs.
Since 2019, rents have surged by more than 30%, and grocery prices have increased by 25%, placing additional strain on renters who are struggling to keep up with rising costs.
Overall, the latest earnings reports suggest stability in the banking sector, with no significant deterioration in asset quality. Narron emphasized that strong revenues, profits, and robust net interest income indicate a resilient banking environment. Mulberry echoed this sentiment, acknowledging the strength of the financial system while cautioning that prolonged high interest rates could elevate stress levels in the sector.