Loan Loss Reserves Creep Up at Cautious Wells and Citi

The banks see strength — in consumer spending, debit, credit and in a recession that may prove short-lived.

But they are preparing for some bumpiness in the months ahead and some weakness in those same metrics.

Watch what they say, in other words, and what they do.

On Friday, Wells Fargo and Citigroup posted results that showed growth in card transactions and in the cards outstanding. Management commentary focused on the fact that, in many cases, consumer spending remains above pre-pandemic levels, and the continued tight labor market might prove any recession to be short-lived if there is indeed a recession.

But then again: These same firms, echoing JPMorgan’s report earlier in the week, have boosted loan loss reserves on their books, in at least some anticipation that some loans may sour. The net build-on allowance for credit losses in the period came to about $375 million, Citigroup said, compared to a net release of $2.4 billion last year.  This comes even as CEO Jane Fraser offered on the call that “little of the data I see tells me the U.S. is on the cusp of a recession.”

Consumer spending, she said, remains above pre-pandemic levels, especially in travel and entertainment with household savings providing a cushion for future stress.

“Similarly, our corporate clients see robust demand and healthy balance sheets with revenue softness attributed to supply chain and strain so far,” she said.  Any recession would not be as sharp as we’ve seen in the past, said Fraser.  Spending was up 10% on the company’s branded cards, and consumers are continuing to pay those obligations.

And as Fraser said on the call, “our consumer clients are heavily prime.”

During the Wells Fargo call, management said that debit card spending was up 3%, lapping a period when stimulus checks proved a tailwind for debit transactions. Credit card spending surged 28%. CEO Charles Scharf said that payment rates, deposit levels, utilization and revolving debt trends do not yet indicate signs of stress.

Reserves are Creeping Up  

Nonetheless: Wells reserved $580 million in the second quarter for its own loan loss reserves, which stands in stark contrast to the release of $1.26 billion a year earlier.

In recent quarters, we’ve seen some discussion of platforms, of tech in the service of the great digital shift. As for the technological initiatives, commentary on the Wells call noted that the company has relaunched its automated its digital investing platform.

And as we spotlighted earlier on Friday (July 15), more consumers are opting to remain digitally engaged with their banks. JPMorgan, as we reported on Wednesday, has stated that active mobile customers were up 11% year on year to 47.4 million. Wells Fargo’s mobile users gained 4% year over year. Total digitally active customers in the period were 33.4 million, a 2% gain. Citi’s active mobile users in the quarter were 17 million, surging 14% from the second quarter of 2021.

Read Also: Bank Earnings Show Great Digital, Mobile Shift is Unstoppable