Major banks are bracing for increased risks in their lending practices as interest rates reach over two-decade highs 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, a measure of funds set aside to cover potential losses from credit risks, including bad debt and commercial real estate loans.
JPMorgan set aside $3.05 billion for credit losses in Q2, while Bank of America allocated $1.5 billion. Citigroup’s allowance for credit losses rose to $21.8 billion, marking a more than threefold increase from the previous quarter, and Wells Fargo established provisions of $1.24 billion. These preparations reflect banks’ concerns about a riskier lending landscape, where both secured and unsecured loans may lead to higher losses.
A recent analysis by the New York Fed revealed that total household debt in the U.S. has reached $17.7 trillion across consumer loans, student loans, and mortgages. Rising credit card issuance and delinquency rates have also been noted as individuals begin to deplete their pandemic savings and increasingly rely on credit. Credit card balances hit $1.02 trillion in the first quarter of this year, marking the second consecutive quarter that balances surpassed the trillion-dollar threshold. Commercial real estate remains in a volatile situation.
Experts highlight the ongoing challenges in the banking sector, particularly for lower-income consumers who have seen their savings decline since the pandemic. According to Citi’s CFO Mark Mason, the financial health of consumers varies significantly across different income and credit score brackets, with those in the highest income quartile maintaining savings while lower-income consumers are more vulnerable to rising costs.
The Federal Reserve has maintained interest rates at a historic high of 5.25-5.5% as it waits for inflation to stabilize at its 2% target before considering rate cuts. Despite banks preparing for a potential uptick in defaults later this year, experts indicate that current default rates do not yet suggest a consumer crisis. Some observers note a divide between homeowners who locked in low fixed rates on their mortgages during the pandemic and renters facing increased rental costs without similar financial advantages.
Currently, despite the looming concerns, the latest earnings reports show no major new issues regarding asset quality. Strong revenues and net interest income offer a favorable outlook for the banking sector, which remains robust amid these challenges. Nevertheless, analysts warn that prolonged high interest rates could lead to increased stress for banks and consumers alike.