US banks are preparing for a significant hike in losses on loans – with the six biggest banks reportedly keeping aside $7.6 billion for loans they estimate will not be recovered.
“While things may look calm on the surface, the financial seas are on the verge of getting rough,” Quartz reported
Defaults have remained relatively low for three years but “US lenders are starting to see the negative effects of higher rates and inflation on borrowers” the Financial Times reports.
According to estimates reported in Bloomberg, the giants sometimes described as the ‘Big Six’ of US banking – JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – are believed to have written off $5bn in relation to defaulted loans in the second quarter of 2023.
An additional $7.6bn will also be set aside to cover loans that could go bad, some forecasts indicate.
Those write offs and contingencies are almost twice recorded for the same period in 2022 – and would the the largest losses in loans since the write offs at the beginning of the Covid crisis.
Commercial real estate loans have become a significant concern for banks and investors and banks are said to be bracing for a rush to exit the market.
Figures released in May of this year showed commercial real estate prices fell in the US during the first quarter for the first time in more than a decade according to Moody’s Analytics. The data added to concerns about the the risk of financial stress in the banking industry
US banks prepare for losses in rush for commercial property exithttps://t.co/3XUGDsa0gp
— Michal Stupavsky, CFA (@MichalStupavsky) June 16, 2023
Adding to commercial property loan woes is the way these debts have been structured – with many mortgages given as interest-only loans, which leaves the borrower with the entire principal to pay at the end.
If commercial real estate loan losses spiral, regional banks will likely be hardest hit, with some analysts believing the trend might lead to further takeovers and mergers in banking as smaller players get swallowed up by larger competitors.
Data provider Trepp told the Wall Street Journal recently that “interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013.”
But credit card difficulties are also causing headaches for US banks – with delinquencies rising and interest rates pushing up debts for consumers.
In May, America’s credit card balance nudged up a $1 trillion for the first time on record – with the average interest rate on a new card coming in at a staggering 24 percent.
In a recent Forbes report, it was noted that the delinquency rate for credit card customers at least 30 days late on payment rose 134 basis points from one year earlier to 3.66%. Upwards shifts in the unemployment rate would likely exacerbate that trend.
While banking may face stresses from loan defaults and credit card delinquencies, the rise in interest rates which can cripple businesses and families can also fill the coffers of lenders.
However, whether the additional stresses for borrowers lead to a unsustainable numbers of defaults and flights from risk remains to be seen.