Consumer Delinquencies Rise as Economy Softens, Warns U.S. Banks

According to executives at major U.S. banks, consumers are starting to fall behind on their credit card and loan payments as the economy softens, although delinquency levels are still considered modest. Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup reported better-than-expected profits in the first quarter of the year, benefiting from rising interest rates. However, industry leaders warned that this strength would likely taper off as a recession looms and customer delinquencies increase.

Wells Fargo’s CFO, Mike Santomassimo, noted that consumer financial health trends have gradually weakened compared to a year ago. Citigroup also made larger provisions for credit losses despite increased revenue from clients’ interest payments on credit cards. Delinquency rates were rising as anticipated but were still below normal levels in Citigroup’s loan portfolio, according to the bank’s finance chief, Mark Mason. Bank of America provisioned a higher amount for credit losses in the first quarter compared to the previous year, but still below pre-pandemic levels.

While some customers at JPMorgan were starting to fall behind on payments, delinquency levels were still considered modest, said Jeremy Barnum, the finance chief at the bank. However, UBS analysts predicted that worsening economic conditions may lead to credit deterioration throughout 2023 and 2024, with losses eventually surpassing pre-pandemic levels due to an oncoming recession. Despite this, loan defaults are forecast to stay below the peaks experienced in prior downturns, according to UBS.

As large and medium-sized lenders become more conservative in underwriting, net charge-offs are expected to peak in several quarters, leading to slower loan growth in 2023 and 2024, as predicted by Morgan Stanley analyst Betsy Graseck. American Express also reported a slight increase in card loan net write-offs in March, with volumes of past due loans remaining stable compared to February.