NEW YORK (Reuters Breakingviews) – A recession is coming for U.S. banks, but they are wearing comfortable shoes. JPMorgan, Bank of America, Citigroup and Wells Fargo warned on Friday of a weakening economy. Nonetheless, lenders are quite optimistic that both they and their borrowers can easily weather a major downturn.
Big banks have increased the fees they charge to cover the possibility that customers won’t pay them back. Together, the four largest lenders committed $6.2 billion in the last three months of 2022, a third more than in the previous quarter. Slightly more than half related to debt that had failed, and the rest was to debt that could fail.
But the recession everyone is predicting sounds pretty casual. Consider credit cards, one of the riskiest and most lucrative types of debt. Citigroup boss Jane Fraser sees delinquencies rising, but only to “normal” levels. Bank of America is writing off 1.7% of its credit cards, annually, compared with an average of 2.7% since 2013. JPMorgan says the rate at which customers are becoming delinquent is 80% of what it was before the pandemic.
That’s all to the good, because the banks are still leaning heavily on their plastic—as any American household with a mailbox full of pamphlets can attest. Citi and Bank of America each added more than 4 million accounts in 2022. Wells Fargo’s credit card loans grew 21% year-over-year. America’s collective credit card limit is growing at a rate of 9% a year, according to the New York Federal Reserve, the fastest since 2008.
Fortunately, lenders are suitably trained for the downturn. Citi has set aside enough to cover 7.6% of its defaulting credit card loans — more than triple the current level. The picture is similar at other banks. More than a decade of enforced discipline after the 2008 crash, along with tough regulations, leaves them well padded. Bank of America, for example, has about as many loans as it did in 2009, but more than 50% more tangible capital, which acts as a buffer if borrowers default.
Not that lenders can ignore the risk of default. But for now, the bigger danger is that clients will become more demanding about what they expect to earn on deposits. The higher rates rise, the greater the reward for shopping. All the big lenders that reported on Friday warned that it would eat into the interest income that makes up the bulk of their income. For now, the pressing concern is declining loyalty, not declining creditworthiness.
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Major U.S. banks began reporting fourth-quarter earnings on Jan. 13, increasing the amounts they set aside to cover future bad debts in preparation for worsening economic conditions.
JPMorgan said it had $3.57 earnings per share, up 7% from Q4 2021. Bank of America reported $0.85 earnings per share, up 4% year over year. .
Citigroup reported a 21% decline in earnings per share to $1.16, while Wells Fargo’s earnings per share fell 51% to $0.67, driven by a $3.3 billion charge to cover regulatory fines for past misconduct.
JPMorgan set aside $2.3 billion to cover bad loans, compared with about $1.5 billion in the previous quarter. It says the share of credit card loans it may have to write off could rise to 2.6% in 2023, compared to 1.5% in 2022.
Bank of America increased its loan expenses to $1.1 billion for the quarter, up from $898 million in the three months ended Sept. 30. It says 1.7% of credit card loans have been written off, on an annual basis, compared to the 2.7% % average rate since 2013.
(Editing by Liam Proud and Sharon Lam)
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