US Banks Brace for Surge in Bad Debt Write-Offs

The largest U.S. banks are reportedly bracing themselves for a surge in bad debt write-offs, the highest since the early days of the pandemic.

JPMorgan Chase & Co., Citigroup, Wells Fargo and Bank of America are expected to report a combined $5.3 billion in net charge-offs for the third quarter, more than double the figure from a year earlier, Bloomberg reported Wednesday (Oct. 11).

This is happening as interest rates remain elevated and the possibility of an economic downturn looms, with the result that borrowers are finding it increasingly challenging to meet their financial obligations, according to the report. 

The deteriorating credit quality of borrowers is a significant concern for banks, the report said. Consumers with low credit scores are particularly vulnerable, as their savings have been eroded by inflation.

Consumers were largely paying off cards and other loans until recently, PYMNTS reported in July. That began to change in July as the country’s six largest banks reported what was then the highest rate of loan loss since the pandemic began.

As the banks prepare to report their third-quarter results, another factor being closely monitored by analysts and investors is net interest income (NII), which is the difference between the interest earned on loans and the interest paid on deposits, according to the Bloomberg report. Rising deposit costs and intensified competition have put pressure on NII, leading to a drop in revenue for banks.

Loan growth has also been subdued, exacerbating the situation, the report said. Regional lenders have been hit particularly hard by the impact of rising rates, as evidenced by the series of bank failures earlier this year. JPMorgan, however, stands out as an NII outlier due to the benefits it has gained from the acquisition of First Republic.

Additionally, the introduction of new capital rules by federal regulators poses another challenge for banks, per the report.

The investment banking sector is expected to face ongoing challenges, with advisory fees likely to remain depressed and a rebound in merger activity still distant, according to the report. However, underwriting businesses are expected to show improvements compared to last year’s weak levels.

Trading revenue is also a significant factor to watch as the banks report their results, with Citigroup being the only top bank expected to post an increase in this area, the report said. Increased activity in fixed-income, currencies, and commodities markets has contributed to Citigroup’s gains. Nonetheless, trading revenue for the five largest banks is expected to decrease overall, primarily due to tough comparisons to the previous year, when market volatility was heightened by geopolitical events.