As interest rates reach their highest level in over two decades and inflation continues to impact 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 funds set aside to cover potential losses due to credit risks, including defaults or delinquent accounts related to various loans, including commercial real estate (CRE) loans.
JPMorgan reported a $3.05 billion provision for credit losses in the second quarter. Bank of America set aside $1.5 billion, while Citigroup’s allowance totaled $21.8 billion, marking a significant increase from the previous quarter. Wells Fargo reported $1.24 billion in provisions.
These increased provisions indicate that banks are preparing for a more challenging economic environment where both secured and unsecured loans could result in greater losses. A recent New York Fed analysis revealed that total U.S. household debt has reached $17.7 trillion, comprising consumer loans, student loans, and mortgages.
Additionally, credit card issuance has risen, along with delinquency rates, as consumers exhaust their savings from the pandemic and turn to credit cards for support. Credit card balances surpassed $1 trillion for the second consecutive quarter, according to TransUnion. The commercial real estate sector also remains in a vulnerable position.
Experts like Brian Mulberry from Zacks Investment Management emphasize that the financial impact of the COVID era stimulus is still evolving in terms of consumer health and banking stability.
Challenges for banks are anticipated in the coming months. Mark Narron from Fitch Ratings noted that provisions reflect banks’ expectations about future credit quality rather than past performance. He pointed out that economic projections suggest slower growth, rising unemployment, and the possibility of interest rate cuts later this year, potentially leading to increased loan delinquencies and defaults.
Citigroup’s CFO Mark Mason highlighted concerns among lower-income consumers, who have seen their savings decline post-pandemic. He noted a disparity in financial health among different income groups, with only the highest income quartile having maintained savings since 2019.
The Federal Reserve’s interest rates currently sit at a 23-year high of 5.25-5.5%, as the central bank seeks to stabilize inflation toward its 2% target before considering rate cuts.
Despite banks preparing for potential increases in defaults, Mulberry points out that default rates have not yet reached levels indicative of a consumer crisis. He emphasizes the difference in financial strain between homeowners, who benefited from low fixed-rate loans, and renters, who face rising housing costs.
While challenges persist, the latest earnings reports indicated no significant changes in asset quality for the banks. Strong revenues, profits, and net interest income suggest a resilient banking sector. Experts acknowledge the current strength of the financial system but caution that prolonged high interest rates may lead to increased strain in the future.