Some banks are seeing fresh concerns among some retail customers, hinting at challenges ahead as strong U.S. consumers weather a series of challenges in the second half of this year.
Wells Fargo (WFC), Fifth Third Bancorp (FITB) and Capital One (COF) executives said last week that while they are noticing a gap between the two ends of their customer base, low-income consumers are feeling more pain in many ways. Some cited credit deterioration, shrinking savings and a slowdown in spending as reasons.
Fifth Third CEO Timothy Spence said a review of bank account information in Cincinnati showed financial problems for low-income customers and those without homes.
“Low-income renters are at or below pre-pandemic levels of liquidity. There’s no buffer left there,” Spencer said Wednesday at the Barclays Banking Conference in New York.
The strength of US consumers is a hot topic in the financial world at a time when economic data is coming in better than expected despite the Federal Reserve’s campaign to hike interest rates as the central bank tries to slow inflation.
So far, the consumer has been relatively resilient, and there is evidence that lower-income consumers have held spending better than those with higher incomes. But headwinds are mounting as job and wage growth slows, student loan repayments resume and credit conditions tighten.
All of this could cause some problems for banks that rely on consumer loans in recent quarters as companies become more cautious about the economy. Credit card delinquencies are on the rise as of 2021, according to the Fed DataAfter falling to multi-decade lows since 2009, it has climbed steeper than any point.
“As we sit here today, savings are still, overall, slightly higher than pre-pandemic levels,” Capital One CFO Andrew Young said last week.
The total savings of the bank’s customers is still slightly higher than before the pandemic, but those with lower incomes are “roughly back” to pre-pandemic levels. Capital One is a major credit card lender.
Still, he notes, these consumers are “at a premium.”
Bank of America regional banking president Dean Athanasia said consumers still have plenty of cash in their bank accounts and will continue to spend the rest of the year.
“The journey on the consumer side is slow,” he said.
Mike Mayo, a Wells Fargo banking analyst, said the biggest banks have set aside money for loan losses as the unemployment rate approaches 5%. It was 3.8% in August, up from 3.6%.
Over the next two years, Mayo still expects bank loan losses to “close to double”, although historically it will still remain “below the long-term average”.
Banks are starting to shy away from making new consumer loans as much as they did in the past, especially those considered too risky.
Another senior banker who warned last week to be cautious about the future strength of US consumers was JPMorgan Chase (JPM) CEO Jamie Dimon. He cited the possibility of prolonged high interest rates, rising oil prices, economic instability in China and global fiscal debt.
“We don’t know the full effect of all this 12 or 18 months from now,” he said.
It’s a big mistake to say that the consumer is “very good” at the moment, but that “the consumer is strong today and you’re going to have an environment that will grow for years.”
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