Amid rising interest rates at their highest in over two decades and persistent inflation affecting consumers, major banks are preparing for increased risks related to their lending activities.
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 are funds set aside by financial institutions to cover potential losses from credit risks, which include delinquent debts and commercial real estate loans.
JPMorgan allocated $3.05 billion for credit losses, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses reached $21.8 billion, more than tripling its reserves from the previous quarter, and Wells Fargo allocated $1.24 billion.
These reserve increases indicate that banks are bracing for a riskier environment, where both secured and unsecured loans may lead to greater losses. A recent New York Fed analysis revealed that American households owe a combined $17.7 trillion in consumer loans, student loans, and mortgages.
Credit card debt is also on the rise, along with delinquency rates, as individuals exhaust their pandemic-era savings and increasingly rely on credit. In the first quarter of this year, credit card balances exceeded $1 trillion for the second consecutive quarter, according to TransUnion. Additionally, commercial real estate continues to navigate a challenging landscape.
Brian Mulberry, a portfolio manager at Zacks Investment Management, commented on the ongoing impacts of the COVID-19 pandemic and the stimulus measures that have influenced consumer spending and banking health.
Experts suggest that the problems banks could face will manifest in the coming months. Mark Narron, a senior director at Fitch Ratings, noted that credit provisions reflect banks’ future expectations rather than solely past credit quality.
In the near future, banks anticipate slowing economic growth, increased unemployment, and two expected interest rate cuts later this year, which could lead to more delinquencies and defaults.
Citi’s CFO Mark Mason highlighted concerns that emerging risks are primarily seen in lower-income consumers, whose savings have diminished since the pandemic began. He emphasized the disparity among consumers, with only upper-income individuals having more savings now compared to 2019.
Despite these concerns, Mulberry noted that defaults are not currently rising at a level indicative of a consumer crisis. He pointed out differences between homeowners and renters during the pandemic—homeowners benefited from low fixed-rate mortgages, while renters faced rising costs.
With rents increasing over 30% and grocery prices rising 25% from 2019 to 2023, renters are under significant financial strain compared to homeowners who locked in lower rates.
Ultimately, the latest earnings reports indicated no alarming changes in asset quality, with robust revenues, profits, and healthy net interest income suggesting that the banking sector remains resilient. Mulberry remarked on the strength of the current financial system and cautioned that prolonged high interest rates could introduce more stress in the future.