Amid rising interest rates and persistent inflation, major banks are bracing for increased risks in their lending operations. In the recent second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all raised their provisions for credit losses, reflecting a cautious approach to potential financial downturns.
JPMorgan set aside $3.05 billion, while Bank of America allocated $1.5 billion for credit losses. Citigroup’s provisions soared to $21.8 billion, more than tripling its reserves from the prior quarter, and Wells Fargo designated $1.24 billion. These provisions indicate that banks are preparing for a potentially more challenging lending environment, where both secured and unsecured loans may result in greater losses.
A report from the New York Fed highlighted that American households collectively owe $17.7 trillion in various consumer debts, including student and mortgage loans. As consumers draw down their pandemic-era savings and increasingly turn to credit, credit card issuance and delinquency rates are rising. In the first quarter, total credit card balances surpassed $1 trillion for the second consecutive quarter, according to TransUnion.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, emphasized the impact of pandemic stimulus measures on consumer health. However, as banks project slower economic growth and higher unemployment, they anticipate an uptick in delinquencies and defaults. Mark Mason, Citigroup’s chief financial officer, pointed out that the financial strain is especially acute among lower-income consumers, who have seen their savings decline since the pandemic.
The Federal Reserve’s interest rates remain at a two-decade high of 5.25-5.5%, with anticipated cuts later this year dependent on inflation trends. Although banks are preparing for an increase in defaults, current default rates do not suggest an impending consumer crisis.
Mulberry noted the contrasting experiences of homeowners and renters, as those who secured low fixed-rate mortgages during the pandemic are less affected by rising interest rates, unlike renters facing surging rental prices and escalating grocery costs.
Overall, bank earnings reports indicated robustness in asset quality, with strong revenues and resilient interest income suggesting a stable banking sector, according to analysts. However, they advised close monitoring of potential stresses as elevated interest rates persist.