US Banks Face Growing Risk as Bad Loans Increase
The US banking industry is facing a concerning situation as the number of bad loans continues to rise, putting pressure on major players such as JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. According to Bloomberg analysts, non-performing loans, which are loans where debtors have not made payments for over 90 days, reached a combined total of $24.4 billion in the last quarter of 2023. This represents a $6 billion increase compared to the previous year.
The increase in bad loans is expected to impact bank earnings for the final quarter of 2023, along with rising deposit costs due to higher interest rates. In response to this challenging business climate, the banks are implementing cost-cutting measures. Citigroup is reportedly dealing with layoffs and related expenses, while Wells Fargo has set aside $1 billion for severance packages.
Despite the rise in bad loans, the largest US banks are signaling their expectation of a shift in trend by reducing capital provisions set aside for future non-performing loans.
Regional Banks and Commercial Real Estate
In addition to major banks, regional banks are also facing risks in the form of troubled commercial real estate loans. About 18% of their loan portfolios are exposed to this sector. Desmond Lachman, former Deputy Director at the International Monetary Fund’s Policy Development and Review Department, warns that commercial property owners may start defaulting on their loans by next year. This would be particularly detrimental to small and mid-size banks.
Increasing Charge-Offs
In Q3 of last year, reports emerged that US banks were experiencing higher “charge-offs,” which refers to losses on loans designated as unrecoverable. The rate of charge-offs was 17% higher than the previous three months and 75% higher than in 2022.
Hot Take: US Banks Face Mounting Pressure Amidst Rising Bad Loans
The US banking industry, including major players like JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, is confronting a growing challenge as bad loans continue to increase. Non-performing loans reached $24.4 billion in the last quarter of 2023, representing a $6 billion year-over-year increase. The rise in bad loans is expected to impact bank earnings and deposit costs. Major banks are implementing cost-cutting measures while reducing capital provisions for future non-performing loans. Additionally, regional banks are at risk due to troubled commercial real estate loans. As commercial property owners potentially default on their loans, small and mid-size banks could face significant consequences. The banking industry will need to navigate these challenges and adapt to the evolving business climate to mitigate potential risks.
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