With interest rates reaching heights not seen in over two decades and inflation impacting consumers, major banks are bracing for increased risks in their lending practices.
In the second quarter, several leading banks, including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, have increased their credit loss provisions compared to the previous quarter. These provisions account for potential losses from credit risks, such as unpaid debts and commercial real estate (CRE) loans.
Specifically, JPMorgan set aside $3.05 billion for credit losses, Bank of America reserved $1.5 billion, Citigroup’s allowance climbed to $21.8 billion—more than tripling from the previous quarter—and Wells Fargo reserved $1.24 billion.
These escalated provisions indicate that banks are preparing for a more turbulent financial environment where both secured and unsecured loans may incur significant losses. According to the New York Federal Reserve, Americans currently carry $17.7 trillion in household debt, encompassing consumer loans, student loans, and mortgages.
Credit card issuance and delinquency rates are also on the upswing as consumers, increasingly tapping into credit in light of dwindling pandemic-era savings, confront financial pressures. The first quarter saw credit card balances exceed $1 trillion for the second consecutive quarter, as reported by TransUnion. Moreover, the stability of commercial real estate remains uncertain.
Brian Mulberry, a portfolio manager at Zacks Investment Management, noted that the aftermath of the COVID-19 pandemic still influences consumer banking health, largely shaped by government stimulus efforts.
The provisions set aside by banks today reflect their economic forecasts rather than recent credit performance. Mark Narron from Fitch Ratings emphasized that the current provisioning strategy has shifted from responding to bad loans to anticipating future economic scenarios.
In the short term, banks are bracing for slower economic growth, a potential rise in unemployment, and two anticipated interest rate reductions later this year. Such conditions could lead to increased delinquencies and defaults as 2023 progresses.
Citi’s CFO, Mark Mason, highlighted that the impact of high inflation and interest rates is being felt particularly among lower-income consumers, whose savings have diminished post-pandemic. Despite this, the U.S. consumer market remains resilient overall, with only the highest income quartile reporting more savings than before 2019.
The Federal Reserve’s interest rates currently sit at 5.25-5.5%, maintained at a 23-year high as officials await inflation figures to approach a target of 2% before implementing expected rate cuts.
Despite these projections, Mulberry reassures that rising defaults have not yet escalated to a consumer crisis level. He notes a key distinction between homeowners, who benefitted from fixed low rates during the pandemic, and renters, who face steep rental increases and cost of living adjustments.
Currently, major banks are showing resilience, with earnings indicating strong revenues and profits despite the challenging economic landscape. Mulberry remarks on the enduring strength of the banking sector, calling it a relief to see the financial system still standing robustly amid high interest rates.
In summary, while banks are cautious about potential economic challenges ahead, the overall outlook remains hopeful due to resilient asset quality and profits. This indicates that, even in uncertain times, the foundations of the banking system are strong, providing a beacon of security for consumers and the economy.