With interest rates reaching their highest level in over two decades and inflation continuing to affect consumers, major banks are preparing to navigate increased risks associated with their lending practices.
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 represent funds set aside by financial institutions to cover potential losses from credit risks, including bad debt and delinquent loans, particularly in commercial real estate.
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 allowance climbed to $21.8 billion by the end of the quarter, tripling its reserve buildup from the prior quarter. Wells Fargo reported provisions of $1.24 billion.
These increased reserves indicate that banks are preparing for a riskier economic climate, where both secured and unsecured loans may lead to greater losses. According to a recent analysis by the New York Fed, American households collectively owe $17.7 trillion across various types of loans, including consumer debts, student loans, and mortgages.
Moreover, credit card issuance and delinquency rates are on the rise as people deplete 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 where the total exceeded the trillion-dollar threshold, as reported by TransUnion. The commercial real estate sector also remains in a challenging situation.
As noted by Brian Mulberry, a client portfolio manager at Zacks Investment Management, the banking landscape and consumer health are still affected by the economic conditions following the COVID-19 pandemic and the accompanying stimulus measures.
However, potential banking issues are expected to manifest in the forthcoming months. Mark Narron, a senior director at Fitch Ratings, emphasized that the provisions reported by banks do not merely reflect recent credit quality but rather what banks anticipate will happen in the future.
He explained that the shift in how banks manage credit provisions is influenced more by macroeconomic forecasts than by current loan performance. In the near future, banks foresee slowing economic growth, a rise in unemployment, and potential interest rate cuts later this year.
Citi’s chief financial officer, Mark Mason, highlighted that the signs of distress in the economy seem to be primarily affecting lower-income consumers, who have experienced a significant decrease in savings since the pandemic.
Despite these red flags, Mulberry pointed out that defaults have not yet increased to a level indicative of a consumer crisis. He noted a divide between homeowners and renters, as homeowners locked in low fixed rates, while renters face rising rental costs.
Nationwide, rents have surged over 30% from 2019 to 2023, and grocery prices have risen by 25%, putting pressure on renters who are struggling to keep up with expenses due to stagnant wage growth.
Overall, the recent earnings reports suggest that there were no significant changes in asset quality. Strong revenues, profits, and net interest income are positive signs for the banking sector’s health. Mulberry concluded that while the banking system remains robust, persistent high-interest rates could lead to increased stress in the future.