As interest rates remain at their highest levels in over two decades and inflation continues to challenge consumers, major banks are bracing for potential risks associated with their lending practices.
In the second quarter, prominent banks including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses compared to the previous quarter. These provisions are reserves set aside by financial institutions to cover potential losses from credit risks, including overdue or bad debts and loans, such as those in commercial real estate (CRE).
JPMorgan allocated $3.05 billion for credit losses in the second quarter, while Bank of America set aside $1.5 billion. Citigroup’s credit loss provisions soared to $21.8 billion by the end of the quarter, more than tripling its reserves from the previous quarter, and Wells Fargo earmarked $1.24 billion.
These increased reserves indicate that banks are preparing for a more challenging economic environment, where both secured and unsecured loans could lead to greater losses. According to a recent analysis by the New York Fed, total household debt in the U.S. has reached $17.7 trillion, encompassing consumer loans, student loans, and mortgages.
Rising credit card issuance and delinquency rates are also notable as individuals draw down their savings from the pandemic and increasingly rely on credit. Credit card balances reached $1.02 trillion in the first quarter of this year, marking the second consecutive quarter that has surpassed the trillion-dollar threshold, as reported by TransUnion. Additionally, the commercial real estate sector remains vulnerable.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, commented on the situation, highlighting that the ongoing effects of the COVID-19 pandemic and the impact of government stimulus on consumer finances are significant factors.
However, any challenges for banks are expected to emerge in the coming months. Mark Narron, a senior director at Fitch Ratings, explained that quarterly provisions reflect banks’ expectations for future credit quality rather than just recent trends.
Currently, banks anticipate slowing economic growth, increased unemployment rates, and potential interest rate cuts in September and December, which may lead to more delinquencies and defaults as the year progresses.
Citigroup’s chief financial officer, Mark Mason, pointed out that worsening financial conditions are particularly affecting lower-income consumers, who have depleted their savings in the wake of the pandemic.
Despite some warning signs, experts suggest that defaults have not yet begun to rise significantly enough to indicate an impending consumer crisis. Mulberry noted that homeowners who secured low fixed-rate mortgages during the pandemic are generally faring better financially than renters, who are facing rising rental costs.
As rent prices have surged by more than 30% nationwide between 2019 and 2023 and grocery costs have risen by 25%, renters without locked-in lower rates are experiencing increased financial strain.
In summary, there were no unexpected changes in asset quality among banks in the latest earnings reports. Strong revenues, profits, and stable net interest income are all indicators of a robust banking sector, although there is cautious optimism about the potential stress that continued high interest rates could induce.