Big banks are gearing up for increased risks in their lending practices as interest rates reach more than two-decade highs and inflation continues to affect consumers. In the second quarter, major financial institutions including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo raised their provisions for credit losses compared to the previous quarter. These provisions are funds set aside to cover potential losses from credit risks like delinquent loans.
JPMorgan allocated $3.05 billion for credit losses, while Bank of America set aside $1.5 billion. Citigroup’s allowance for credit losses rose significantly to $21.8 billion, and Wells Fargo’s provisions totaled $1.24 billion. This increase in reserves indicates that banks are preparing for a more challenging environment, where both secured and unsecured loans may lead to larger losses.
A recent analysis from the New York Fed reported that Americans owe around $17.7 trillion in consumer loans, student loans, and mortgages. Additionally, credit card issuance and delinquency rates have been climbing as many individuals exhaust their pandemic-era savings and increasingly rely on credit. Credit card balances surpassed $1 trillion in the first quarter of this year, marking the second consecutive quarter in which they exceeded that threshold.
Brian Mulberry, a client portfolio manager at Zacks Investment Management, stated that the banking sector is still recovering from the COVID era, which was heavily influenced by government stimulus directed at consumers. However, potential issues for banks may emerge in the forthcoming months.
Mark Narron, a senior director at Fitch Ratings, explained that current provisions reflect banks’ expectations regarding future credit quality rather than past performance. He noted that banks anticipate slower economic growth, a potential rise in unemployment, and two planned interest rate cuts later this year, which could lead to increased delinquencies and defaults.
Citigroup’s CFO, Mark Mason, reported that warning signs are especially evident among lower-income consumers, who have seen their savings decline since the pandemic. He emphasized that only the highest income quartile has managed to save more compared to 2019, highlighting a disparity in performance across different income levels and credit scores.
The Federal Reserve has maintained interest rates at a 23-year high of 5.25-5.5% while awaiting inflation metrics to stabilize towards a target of 2% before implementing anticipated rate cuts.
Despite these growing concerns, Mulberry indicated that defaults have not yet surged to a level indicative of a consumer crisis. He suggested that there is a notable divide between homeowners and renters during this period. While homeowners have secured low fixed rates on their debt, renters have faced escalating rental costs—over 30% nationwide since 2019—without similar financial advantages.
The most recent earnings reports reflect that asset quality remains stable. With robust revenues and resilient net interest income, the banking sector shows signs of strength. Mulberry concluded that while the financial system is currently solid, prolonged high interest rates may increase stress on consumers and banks alike.