As interest rates remain at their highest levels in over two decades and inflation continues to pressure consumers, major banks are bracing for potential risks in their lending operations.
In the second quarter, major banks including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo increased their provisions for credit losses compared to the previous quarter. These provisions represent funds set aside to cover possible losses from credit risks, such as delinquent loans and bad debt, including those related to commercial real estate.
JPMorgan established a $3.05 billion provision for credit losses in the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses reached $21.8 billion by the end of the quarter, more than tripling its reserve accumulation from the prior quarter, and Wells Fargo had provisions totaling $1.24 billion.
These increased reserves indicate that banks are preparing for a challenging environment, where both secured and unsecured loans could lead to higher losses. A recent analysis by the New York Federal Reserve found that American households currently owe a collective $17.7 trillion in consumer loans, student loans, and mortgages.
Credit card issuance and delinquency rates are also rising as people deplete their pandemic-era savings and increasingly rely on credit. According to TransUnion, credit card balances reached $1.02 trillion in the first quarter of this year, marking the second consecutive quarter in which total cardholder balances exceeded the trillion-dollar threshold. Additionally, the commercial real estate sector remains in a vulnerable position.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted the ongoing impacts of the COVID-19 pandemic on banking and consumer health, particularly due to the stimulus measures provided during that time.
However, the true ramifications for banks may emerge in the coming months. Mark Narron, a senior director at Fitch Ratings, explained that the quarterly provisions may not accurately reflect credit quality as they are more indicative of banks’ future expectations rather than past performance.
Currently, banks anticipate slower economic growth, a rising unemployment rate, and potential interest rate cuts in September and December, which could lead to further delinquencies and defaults as the year concludes.
Citi’s CFO, Mark Mason, highlighted that the warning signs are primarily evident among lower-income consumers, whose savings have declined since the pandemic began. He noted a clear divide in consumer behavior based on income and credit scores, with only the highest income quartile seeing an increase in savings since 2019.
Despite these concerns, Mulberry stated that current default rates do not indicate a consumer crisis. He pointed out that homeowners who secured low fixed rates during the pandemic have largely avoided financial strain, unlike renters who face significant increases in rent.
Between 2019 and 2023, rents surged over 30%, and grocery costs rose by 25%, leaving renters—who could not take advantage of low mortgage rates—feeling the most financial pressure.
Overall, the latest earnings reports indicate that there are no new significant concerns regarding asset quality. Despite the challenges, the banking sector has shown strong revenues, profits, and resilient net interest income, suggesting a healthy financial system. However, experts are closely monitoring the effects of prolonged high interest rates, which could lead to increased stress for consumers and the banking sector alike.