As interest rates remain at their highest levels in over 20 years and inflation continues to pressure consumers, major banks are bracing for increased risks associated with their lending activities.
In the second quarter, JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all increased their provisions for credit losses compared to the previous quarter. These provisions, which are funds set aside to address potential losses from credit risk—including delinquent loans—highlight the banks’ preparations for a challenging lending environment, particularly regarding commercial real estate (CRE) loans.
JPMorgan set aside $3.05 billion for credit losses during the second quarter, while Bank of America allocated $1.5 billion. Citigroup’s credit loss allowance rose sharply to $21.8 billion, more than tripling its previous quarter’s reserves. Wells Fargo established provisions totaling $1.24 billion.
This buildup indicates that banks anticipate a riskier financial landscape, as both secured and unsecured loans may lead to greater losses. A recent study by the New York Fed revealed that Americans collectively owe $17.7 trillion in consumer loans, student loans, and mortgages.
The issuance of credit cards and rising delinquency rates are emerging as consumers increasingly rely on credit, depleting the savings they accumulated during the pandemic. In the first quarter of this year, credit card balances reached $1.02 trillion, marking the second consecutive quarter that the total cardholder balances surpassed the trillion-dollar mark. The CRE sector also faces significant challenges.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, noted, “We’re still coming out of this COVID era. The banking sector’s health is largely dependent on the stimulus measures directed toward consumers.”
However, analysts suggest that any challenges faced by banks are likely to materialize in the coming months. Mark Narron, a senior director in Fitch Ratings’ Financial Institutions Group, explained that the provisions recorded each quarter do not necessarily represent the immediate credit quality but instead reflect banks’ future expectations.
He pointed out a shift from a historical approach where rising delinquencies precipitated increased provisions, to a current environment where macroeconomic forecasts primarily guide lending practices.
Looking ahead, banks forecast a slowdown in economic growth, a rise in unemployment, and potential interest rate cuts this September and December, which could lead to higher delinquency rates and defaults as the year concludes.
Citi’s chief financial officer, Mark Mason, observed that warning signs appear more pronounced among lower-income consumers, whose savings have diminished since the pandemic. He indicated that only the highest income bracket has managed to increase their savings since 2019, while lower-income consumers are struggling more acutely with high inflation and interest rates.
The Federal Reserve has maintained interest rates at a 23-year high of 5.25-5.5%, awaiting stabilization in inflation to align with their 2% target before considering any rate cuts.
Despite the banks’ preparations for greater defaults later in the year, indications do not yet suggest a pending consumer crisis. Mulberry noted that homeowners with fixed low rates on their debts are not feeling the crunch as much as renters, who face soaring rents that have increased more than 30% nationally since 2019, compounded by a 25% rise in grocery costs during the same period.
Overall, the latest round of earnings reports shows that there have been no significant new risks identified in terms of asset quality. Analysts report that strong revenues, profits, and resilient net interest income signal that the banking sector remains healthy.
Mulberry remarked, “The banking sector shows some strength that, while not entirely unexpected, is reassuring. However, the longer interest rates remain high, the greater the stress on the system.”