Bank of America Corp. and its largest competitors set aside more reserves due to a rising number of customers falling behind on loan payments. Despite executives downplaying the possibility of a crisis, the bank followed the lead of its rivals by taking measures to protect against potential losses.
In the first quarter of 2023, the four largest US lenders experienced a 73% rise in write-offs for bad consumer loans, totaling $3.4 billion. This, combined with increased reserves, caused provisions at these institutions to reach levels not seen since the start of the Covid-19 pandemic.
Previously, banks had enjoyed the financial stability of US consumers, resulting in record low credit losses. However, with inflation levels not seen in decades eating away at savings, Americans are once again struggling to make payments.
Bank executives argue that the recent increase in provisions is merely a return to normal after government stimulus programs during the pandemic artificially kept consumer defaults low.
“We haven’t seen any cracks in that portfolio yet,” said Bank of America Chief Financial Officer Alastair Borthwick on a conference call with reporters. “The consumer is in great shape.”
In a statement, Bank of America, headquartered in Charlotte, North Carolina, reported that its firmwide provisions were lower than expected, thanks to reserve releases related to corporate loans. However, the bank had to increase reserves by $360 million for its consumer business due to higher-than-anticipated credit card balances.
Goldman Sachs Group Inc. reported a significant increase in provisions for the quarter, with the platform-solutions division, which includes the firm’s credit card efforts, seeing a jump to $265 million. The rise was partly attributed to an increase in net charge-offs in the credit card portfolio.
Wells Fargo & Co. attributed its $1.2 billion in provisions to higher net charge-offs in both consumer and commercial loan portfolios. The San Francisco-based bank also stated that it has begun to tighten underwriting standards for credit card loans as it prepares its debt portfolio for an economic slowdown.
“We continue to see some gradual weakening in underlying credit performance, including higher nonperforming assets,” said Wells Fargo Chief Financial Officer Mike Santomassimo on a conference call with analysts.
“We are proactively monitoring our clients’ sensitivity to inflation and higher rates and are taking appropriate actions when warranted.”
The world’s largest credit-card issuer, JPMorgan Chase & Co., reported an 82% increase in bad card loans to $922 million in the first quarter, with the 30-day delinquency rate on those loans also rising to 1.68% from 1.09% a year earlier. This rate is considered a predictor of future losses.
Despite these figures, executives at the New York-based bank have stated that they are not planning any drastic measures. Instead, the focus is on refining the bank’s real estate portfolio, as investors become increasingly concerned about the growing losses on office loans.
“I wouldn’t use the word credit crunch,” CEO Jamie Dimon said on a conference call Friday.
“Obviously, there’s going to be a little bit of tightening and most of that will be around certain real estate things.”
On Friday, Citigroup Inc. provided reassurance to its investors, stating that the higher credit losses in the first quarter were entirely anticipated. CEO Jane Fraser mentioned that the New York-based bank relies on a comprehensive collection of data to monitor borrowers who obtained loans from Citigroup and their management of debt obligations.
“We can’t just rely on FICO scores for assessing the credit of our customers and our portfolio,” Fraser said.
“There is a tremendous amount of data that we draw upon that goes well well beyond that and that’s also, as you can imagine, something that gives us a lot more confidence.”
