US banks suffered nearly $19 billion in debt losses in the second quarter, the highest in more than three years , as lenders grapple with rising defaults by credit card and commercial real estate borrowers.
Lenders reported write-offs (losses on loans deemed nonperforming) of $18.9 billion in the quarter, up nearly 17 percent from the previous three months and up 75 percent from the year-ago quarter.
US Bank Loan Losses are getting bigger and bigger
Banks suffered a loss of 61 cents for every $100 borrowed, the largest since the second quarter of 2020 when the COVID-19 pandemic hit the economy.
The escalation in loan losses coincides with challenges faced by borrowers with variable-rate loans, who now confront elevated repayment obligations following a series of forceful interest rate hikes by the Federal Reserve aimed at combating surging inflation.
Concurrently, individuals are depleting the savings they amassed during the pandemic, while property owners are encountering difficulties in leasing office space due to the increased prevalence of remote work.
Gerard Cassidy, a banking analyst at RBC, interpreted these loan losses as a reversion to normalcy after the pandemic period, during which banks had grown accustomed to exceptional loan quality.
The loan losses come during a difficult year for the U.S. banking sector, marked by the failure of Silicon Valley Bank and several other financial institutions. Moody’s has cut the credit ratings of several smaller financial institutions while considering possible downgrades of some of its larger peers, sparking an industry-wide decline.
Moody states that rising interest rates are putting pressure on profitability, as banks have to pay more to retain depositors demanding higher yields amid worsening credit quality. US banks are bracing for further loan losses. During the second quarter, the companies collectively established additional reserves of $21.5 billion to safeguard against future credit losses. This provision was the largest three-month allocation for future losses by a U.S. bank since mid-2020 and the third highest in a decade. Many banks are preparing for loan defaults in case the unemployment rate rises from the current 3.5% to around 5%.
Cassidy posed the question, “What could push markets to unexpected levels and cause adverse reactions in bank stocks?” He added, “If the unemployment rate exceeds 7%, we will be forced to confront a so-called economic hard landing.”
In a staggering turn of events, the financial landscape of credit card lending in the United States has been marked by substantial losses, with no room for ambiguity. The second quarter brought forth a financial reckoning, revealing a dire situation that demands unwavering attention. More than half of these recent losses can be directly attributed to credit card lending, a domain that carries a weight of approximately $1 trillion in loans. Yet, astonishingly, this credit terrain suffered a grave hit, with banks absorbing a formidable $10.7 billion loss during this period alone.
Furthermore, it’s imperative to address a concerning and escalating concern: the stark reality of losses stemming from loans tied to commercial real estate. An alarming $1.17 billion loss was incurred on loans worth a staggering $1.16 trillion. This financial debacle is particularly noteworthy as it pertains to commercial real estate that remains unoccupied by its owners. This astronomical figure, more than doubling from the previous quarter, is an ominous sign and stands as the highest recorded loss in over a decade.
Unveiling the extent of this fiscal crisis, the spotlight falls on Capital One, a prominent and influential player in the US credit card arena. During the second quarter, this industry giant faced the most substantial loan losses, culminating in charge-offs amounting to a staggering $2.77 billion. To further compound this dire situation, Capital One’s delinquent loans surged to an alarming $11.8 billion. Delinquency, in this context, signifies borrowers who have fallen behind on at least one payment. This dramatic increase from the previous year, when delinquent loans stood at $8.5 billion, adds fuel to the flames of this already distressing scenario.
In the face of these ominous figures, Capital One’s Chief Executive, Richard Fairbank, held a candid discourse with analysts last month. Acknowledging the unprecedented credit performance witnessed over the last three years, Fairbank is unequivocal in his assertion that there lies a critical period of recalibration on the horizon. The aftermath of this staggering credit performance, he notes, necessitates an inevitable period of reparation, especially for consumers who may have narrowly escaped the brunt of these losses over the preceding three years.
The alarming losses witnessed in the US credit card lending sector present a stark and urgent call for action. The magnitude of these losses, particularly in the credit card and commercial real estate domains, is impossible to ignore. The financial landscape demands rigorous scrutiny, assertive measures, and an unwavering commitment to rectify and reconfigure the course ahead. As stakeholders and observers alike, it is imperative that we confront these figures with both vigilance and action, in order to ensure a more secure and stable financial future.
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