As interest rates remain at their highest level in over two decades and inflation continues to pressure consumers, major banks are proactively adjusting their lending strategies to mitigate potential risks.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their allocations for credit loss provisions. These provisions are funds set aside to cover anticipated losses from credit risks, including defaults on loans and commercial real estate (CRE) loans.
JPMorgan reserved $3.05 billion for credit losses during the quarter, while Bank of America allocated $1.5 billion and Citigroup’s allowance reached $21.8 billion, significantly increasing its reserve. Wells Fargo set aside $1.24 billion.
These increased provisions indicate that banks are preparing for a potentially more challenging environment, as both secured and unsecured lending could lead to larger losses. A report from the New York Federal Reserve highlighted that Americans currently owe a total of $17.7 trillion in various forms of consumer debt, including loans and mortgages.
Additionally, the issuance of credit cards and delinquency rates are climbing as consumers exhaust their pandemic-era savings and rely increasingly on credit. Credit card balances surpassed $1 trillion for the second consecutive quarter, according to data from TransUnion. The commercial real estate sector also faces considerable uncertainty.
Experts note that the economic impacts of the pandemic continue to shape consumer banking behavior. Brian Mulberry from Zacks Investment Management emphasized that the consumer’s financial health post-COVID has largely been influenced by government stimulus measures.
Looking ahead, industry analysts believe that the challenges for banks may become more apparent in the coming months. Mark Narron, a senior director at Fitch Ratings, stated that the provisions set aside by banks are more reflective of future expectations rather than past credit quality.
Currently, banks forecast slower economic growth, increased unemployment, and anticipate two interest rate cuts later this year. This could result in higher rates of delinquency and defaults as 2024 approaches.
Mark Mason, Citigroup’s CFO, highlighted that these risks appear particularly acute among lower-income consumers, who have seen their savings diminish in the aftermath of the pandemic. He noted a significant performance gap across various income levels, where only the highest income quartile maintained increased savings compared to pre-pandemic levels. Consumers with stronger credit scores are driving spending growth, while those with lower credit scores are experiencing higher delinquency rates amidst rising inflation and interest rates.
The Federal Reserve continues to maintain interest rates between 5.25% and 5.5%, waiting for inflation metrics to stabilize towards the target of 2% before considering rate cuts.
Despite preparations for potential defaults, current data does not indicate an imminent consumer crisis, according to Mulberry. There is a notable distinction between homeowners and renters in terms of financial impact. Homeowners have benefited from low fixed mortgage rates, while renters face increasing pressure from rising rents and grocery prices.
While challenges persist, the latest earnings reports indicate that there has been no significant deterioration in asset quality, with strong revenues and profits reflecting a resilient banking sector. Analysts suggest that although some strength remains in the financial system, ongoing high interest rates could lead to more stress in the future.