Big Banks' Loan Losses Spike as Credit Card Charge-Offs Rise

America's big banks are due to report their largest increase in loan losses since the pandemic.

As the Financial Times reported Monday (July 10), analysts project the six largest banks in the U.S. — J.P. Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — wrote off a combined $5 billion connected to defaulted loans in the second quarter.

Meanwhile, analysts also estimate these banks will reserve around $7.6 billion for loans that could turn south. In both cases, those numbers are almost twice what they were in the second quarter of 2022, though still below the numbers from the start of the COVID pandemic.

According to the report, credit cards are the biggest headache for several of the banks. For example, J.P. Morgan's credit card loan charge-offs came to $1.1 billion, versus $600 million in the second quarter of 2022. For Bank of America, credit card loans make up around 25% of its charge-offs, analysts say.

This follows news from June that credit card delinquency rates had begun to surpass pre-pandemic levels for at least three companies: Capital One, Discover and Bread Financial.

And research earlier this year by PYMNTS found many consumers stretched when it comes to dealing with their credit cards. 

For example, consumers who live paycheck to paycheck and have issues paying their monthly bills carry average balances of 157% of their available savings — meaning they would still have a balance, even if they cleared out their savings accounts entirely to pay their debts.

Aside from credit cards, commercial real estate loans are also a pain-point for banks, the FT report noted, with property owners seeing a decline in demand for office space due to the hybrid/remote work trend that began with the pandemic.

Wells Fargo CEO Charlie Scharf — whose bank is the largest commercial real estate lender of the country's banking giants — had warned of significant risks in the sector during a speech earlier this year.

“We look city by city, we look property by property to look at our exposures, and I would say there’s no question that there will be losses,” Scharf said.

He added that his bank is proactively managing its portfolio of loans while working with borrowers to restructure the terms of their deals and is not “overly concentrated” in office spaces.

However, the FT notes that Wells Fargo told investors recently that it added $1 billion to its loan loss provisions to cover losses on office buildings and other under-performing properties.

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