NEW YORK, April 18 (Reuters) – Consumers are starting to default on their credit card and loan payments as the economy slows, according to executives at the biggest US banks, though they said arrears are still modest.
Earnings at Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N), Wells Fargo & Co (WFC.N) and Citigroup Inc (CN) beat analysts’ forecasts as the lending giants were bolstered by rising interest rates got lucky. But industry chiefs warned that strength would ebb this year as a recession looms and customer delinquencies mount.
“We’ve seen that some consumer financial health trends have started to weaken year over year,” Wells Fargo chief financial officer Mike Santomassimo said on Friday in a conference call to discuss first-quarter results.
While arrears and net charge-offs — a liability to a bank that is unlikely to be collected — have been rising slowly as expected, consumers and businesses in general remain strong, said the bank’s CEO Charlie Scharf.
The company set aside $1.2 billion in the first quarter to cover potential loans.
Citigroup also built larger provisions for loan losses, although it earned more revenue from customers’ interest payments on credit cards.
Default rates rose as expected but were still below normal levels on the bank’s “very high quality” loan portfolio, said Mark Mason, the bank’s chief financial officer.
“We have tightened credit standards, in particular due to the current market environment for cards. We continue to calibrate our lending based on what we see based on macroeconomic trends,” Mason said.
Delinquency rates are likely to return to “normal” levels of 3% to 3.5% for branded cards and 5% to 5.5% for retail services by early 2024, Mason said. Current default rates are 2.8% for branded cards and 4% for retail services, according to Citi’s presentation of its earnings.
Bank of America provided $931 million for loan losses in the quarter, much more than the $30 million a year ago but less than $1.1 billion for the fourth quarter. Total net charge-offs on loans reached $807 million, up sequentially but still below pre-pandemic levels, the bank said in its earnings release.
“The consumer is in excellent shape in terms of credit quality by historical standards. Employment remains good, wages remain good and we haven’t seen any cracks in this portfolio yet,” Bank of America chief financial officer Alastair Borthwick told reporters.
Some of JPMorgan’s clients were beginning to default, but arrears were still modest, said Jeremy Barnum, chief financial officer of the largest US lender.
“We don’t see much there to indicate a problem,” he said.
The bank more than doubled the amount it set aside for loan losses in the first quarter year over year to $2.3 billion, reflecting net charge-offs of $1.1 billion.
Deteriorating economic conditions would “lead to a deterioration in credit ratings in 2023 and 2024, with losses eventually exceeding pre-pandemic levels as a recession looms,” UBS analysts led by Erika Najarian predicted. Still, loan defaults are forecast to remain “below previous downturn peaks,” they said.
As large and mid-sized lenders become more conservative in their underwriting, their net charges are likely to peak in a few quarters, wrote Morgan Stanley analyst Betsy Graseck. “That means slower credit growth” in 2023 and 2024, she wrote.
American Express said in a filing Tuesday that net card loan charge-offs rose slightly to 1.7% in March, compared to 1.4% at the end of February. The volume of delinquent loans was stable from February to March.
Reporting by Tatiana Bautzer; additional reporting by Saeed Azhar; Edited by Lananh Nguyen and Nick Zieminski
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