Major banks are bracing for increased risks in their lending practices as interest rates reach their highest levels in over two decades and inflation continues to impact consumers. In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses, which are funds set aside to cover potential losses from lending, including delinquent debts.
JPMorgan allocated $3.05 billion for credit losses in the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses hit $21.8 billion, tripling from the previous quarter, and Wells Fargo put aside $1.24 billion. These provisions indicate that banks are preparing for a tougher lending environment where both secured and unsecured loans could result in significant losses.
A recent analysis from the New York Fed revealed that American households owe a staggering $17.7 trillion across consumer loans, student loans, and mortgages. As pandemic-era savings diminish, credit card usage and delinquency rates are rising. Credit card balances surpassed $1 trillion for the second consecutive quarter, according to TransUnion, while the commercial real estate sector is also facing challenges.
Experts, including Brian Mulberry from Zacks Investment Management, acknowledge that the industry is still recovering from the COVID era, largely due to the stimulus provided to consumers. However, issues for banks are anticipated in the upcoming months.
Mark Narron of Fitch Ratings pointed out that current provisions reflect banks’ future expectations rather than their recent credit quality experiences. He noted concerns about slowing economic growth, rising unemployment, and potential interest rate cuts later this year, which could lead to increased delinquencies and defaults.
Citigroup CFO Mark Mason highlighted that the risk signals are primarily evident among lower-income consumers, who have experienced significant declines in their savings in recent years. He emphasized a growing disparity in consumer performance across different income and credit score brackets.
As the Federal Reserve maintains interest rates at a 23-year high of 5.25-5.5%, the banks prepare for possible defaults, though current default rates do not suggest an impending consumer crisis. Mulberry pointed out that homeowners who secured low fixed rates during the pandemic are less affected by rising interest rates compared to renters facing soaring rental costs.
Overall, despite the potential risks ahead, the latest earnings reports indicate that the banking sector remains strong, with robust revenues and profits. Analysts perceive a healthy banking infrastructure, although sustained high-interest rates could lead to increased pressure in the future.