Loan losses rise in the US

Major banks in the United States are expected to witness a substantial surge in loan losses, marking their highest levels since the onset of the pandemic, according to a report released Monday (10th July). Analysts project that the six largest banks in the country, namely J.P. Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley, collectively wrote off a total of $5 billion in defaulted loans during the second quarter.

Moreover, industry experts estimate that these banks will set aside approximately $7.6 billion to cover potential future losses on loans. Both figures represent nearly double the amounts recorded in the second quarter of 2022, although they still remain below the peak levels observed during the COVID-19 outbreak.

The report highlights credit cards as a significant concern for several banks. For instance, J.P. Morgan reported credit card loan charge-offs amounting to $1.1 billion, compared to $600 million during the same period last year. Analysts suggest that credit card loans constitute approximately 25% of Bank of America’s charge-offs.

This development follows news from June, revealing that credit card delinquency rates have surpassed pre-pandemic levels for at least three companies: Capital One, Discover, and Bread Financial.

Earlier this year, a research report indicated that many consumers are facing financial strain when it comes to managing their credit cards. The study revealed that individuals living paycheck to paycheck, who struggle to meet their monthly expenses, carry average balances of 157% of their available savings. This means that even if they depleted their entire savings to repay their debts, they would still have outstanding balances.

Apart from credit cards, banks are also grappling with challenges related to commercial real estate loans. The FT report noted a decline in demand for office spaces as a result of the hybrid/remote work trend, which emerged during the pandemic. Property owners are experiencing difficulties due to this shift in demand.

Charlie Scharf, CEO of Wells Fargo, the largest commercial real estate lender among the country’s banking giants, had previously warned about significant risks in the sector during a speech earlier this year. Scharf emphasised that his bank conducts a meticulous evaluation of its loan exposures on a city-by-city and property-by-property basis, acknowledging that losses are inevitable.

He further stated that Wells Fargo is proactively managing its loan portfolio and collaborating with borrowers to restructure the terms of their agreements. Scharf reassured stakeholders that the bank does not have an excessive concentration of loans tied to office spaces.

Nonetheless, the FT report revealed that Wells Fargo recently increased its loan loss provisions by $1 billion to account for potential losses stemming from office buildings and other underperforming properties.