Jump in Bad Loans Threatens Big Banks’ Earnings

The specter of an increase in bad debt hangs over America’s largest lenders.

Banks such as JPMorgan Chase and Wells Fargo will release their earnings in the coming days, and as the Financial Times (FT) reported Monday (Jan. 8), those earnings will likely include a rise in non-performing loans.

Those loans — debt from borrowers who are at least 90 days delinquent — are expected to have climbed to $24.4 billion for the four biggest U.S. banks, the report said, up by almost $6 billion since the end of 2022.

According to the report, earnings for the six largest banks — JPMorgan, Wells Fargo, Bank of America, Citi, Goldman Sachs and Morgan Stanley — are projected to have fallen 13% on average for the closing quarter of 2023 compared to the same quarter in 2022.

“Year-ahead outlooks get a lot of attention in fourth-quarter earnings calls,” said Barclays analyst Jason Goldberg. “I’m expecting that banks will indicate that the recent drop in net interest income will hit its trough this year.

The report notes that while banks have been struggling with bad loans tied to commercial real estate, they are also contending with a more recent uptick in delinquent consumer debt, especially credit cards and auto loans.

Last year saw credit card debt in the U.S. balloon to $1.08 trillion, a trend fueled by millennial consumers, according to data from the Federal Reserve Bank of New York. The findings showed that credit card balances had risen by $154 billion since 2022, the largest increase in the 25 years the bank has been monitoring the data.

“Many people are resorting to credit cards to navigate difficult financial times, especially as the rising prices of goods and services continues to weigh on U.S. consumers’ wallets this holiday season,” PYMNTS wrote last month.

“The Credit Card Use Deep Dive Edition” of the “New Reality Check: The Paycheck-to-Paycheck Report,” a PYMNTS Intelligence/Lending Club collaboration, found that nearly 60% of consumers living paycheck to paycheck own credit cards, with 80% owning an average of two credit cards.

Meanwhile, a recent report by VantageScore showed a spike in delinquencies across nearly all consumer groups, except those with the highest credit scores.

Increases like these, the FT report says, have caused some analysts to worry, particularly as banks’ loan loss reserves are lower than they were at the start of the pandemic.

“Bank reserves are adequate right now because we are nowhere near the stress levels of back then,” Gerard Cassidy, a bank analyst at RBC Capital Markets, told the FT. “But have they reserved enough for an economic hard landing? The answer is no.”