As high interest rates persist, impacting consumers amid ongoing inflation, major banks are preparing for increased risks associated with their lending operations.
In the second quarter, financial giants such as JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo reported an uptick in provisions for credit losses compared to the previous quarter. These provisions serve as reserves for potential losses arising from credit risks, encompassing overdue debts and commercial real estate loans.
Specifically, JPMorgan allocated $3.05 billion, Bank of America set aside $1.5 billion, Citigroup totaled $21.8 billion—marking a more than threefold increase in its credit reserve from the last quarter—and Wells Fargo reserved $1.24 billion for credit losses.
These increased provisions indicate banks are bracing for a more challenging landscape, where both secured and unsecured loans may lead to larger losses. According to recent data from the New York Fed, Americans collectively owe $17.7 trillion across various loans including consumer loans, student loans, and mortgages.
Moreover, the rise in credit card issuance and delinquency rates highlights a shift as many individuals deplete their pandemic savings and increasingly turn to credit for expenses. In the first quarter of this year, credit card balances surpassed $1 trillion for the second consecutive quarter, as reported by TransUnion. Commercial real estate also remains in a vulnerable position.
Experts note that the effects of the COVID-19 pandemic linger, with financial institutions and consumer health still influenced by the stimulus measures implemented.
Looking ahead, potential issues for banks could manifest in the coming months. Mark Narron from Fitch Ratings points out that current provisions reflect anticipated future issues rather than recent credit quality. Banks are expecting a slowdown in economic growth and possible interest rate cuts later this year, which could exacerbate delinquencies and defaults.
Citi’s CFO, Mark Mason, highlighted a concerning trend among lower-income consumers who have depleted their savings since the pandemic. He observed that while the overall U.S. consumer shows resilience, a disparity exists in financial behavior across different income and credit score segments. Households in the top income quartile have maintained or increased their savings since early 2019, while those with lower credit scores face increased borrowing and lower payment rates due to the strains of high inflation and rising interest rates.
The Federal Reserve currently holds interest rates between 5.25% and 5.5%, the highest in 23 years, awaiting stabilization of inflation measures towards its 2% goal before implementing anticipated rate cuts.
Despite the preparation for potential defaults in the latter half of 2023, industry experts indicate that default rates are not yet escalating to a level that signifies a consumer crisis. Observations suggest a divide between homeowners—who locked in low fixed rates during previous years—and renters, the latter of whom are now faced with elevated rental costs and rising living expenses.
As rental prices increased over 30% between 2019 and 2023, and grocery costs rose by 25%, renters who did not benefit from low interest rate locks are experiencing significant financial pressure.
Currently, the broader picture from recent earnings reports reveals stability within the banking sector, with strong revenues and profits serving as positive signals. Analysts believe that while pressures exist due to prolonged high interest rates, the underlying structure of the financial system remains robust for now.