Charge-offs are returning to pre-pandemic levels — is the banking industry ready?

  • Charge-offs are rising and returning to pre-pandemic levels.
  • While banks seem to be prepared for the increase, their estimated provisions for soured loans are predicated on unemployment remaining within 5%.

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Charge-offs are returning to pre-pandemic levels — is the banking industry ready?

The pandemic years saw a drop off in charge-off rates across the banking sector. But as inflation and interest rates have risen, customers are finding it hard to stay on top of their debt. Consequently charge-off rates have been steadily returning to pre-pandemic levels, with multiple banks reporting an uptick. Collectively, lenders have reported $18.9 billion in charge-offs, which is a 17% increase from the same time last year.

Charge-off landscape

  • Citibank: Citibank reported a 2.06% net charge-off rate which is nearing similar values of 2.74% seen in 2019.  
  • Bank of America: The bank saw consumer net charge-offs reach $869 million which increased from $571 million last year. Meanwhile provisions for losses hovered at $1.1 billion.  
  • Wells Fargo: The consumer net loan charge-off rate increased to 0.58% from 0.56% last year, mostly due to higher charge-offs experienced in Wells Fargo’s credit card portfolio. The company set aside $1.2 billion in provisions to cover possible losses from unrecovered loans. 
  • JPMC: JPMC experienced an increase of $922 million in bad card loans to an 82% increase from the last year. 
  • Capital One: Capital One’s credit card net charge-off rate rose by 0.10% from the last quarter. However, the current charge-off rate of 4.26% is still well below the trends seen during the pre pandemic era, which hovered at 5.15% in 2019. 

The why

In part, the increase in charge-offs is a return to normalcy for the banking industry which saw historically low levels of charge-offs during the pandemic due to low unemployment and the government’s financial relief programs. But 2023 is not a very typical year for the banking sector. Multiple banks have capitulated and experts warn that if unemployment increases to levels above 7%, things could go south. 

Moreover, for consumers, the second half of the year  means a return to student debt payments, as the forbearance period ends in October. This means that customers will have to make hard decisions about credit card and student debt payments, which may further impact delinquency rates across the country. 

Broadly, bank’s remain positive that there is no reason for fear on the horizon, with JPMC’s finance chief, Jeremy Barnum, stating that “we are not seeing a lot there to indicate a problem”. However, this confidence may be predicated on unemployment levels remaining around 5% -- a situation for which multiple banks have already made provisions. But if unemployment levels take a turn for the worse, there may be trouble on the horizon for both consumers and banks in the later half of 2023.  

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