Banks say US consumers in good shape but poll shows Biden gets no credit

The biggest US banks believe American consumers have weathered the Federal Reserve’s cycle of interest rate rises in good shape, but a new poll shows Joe Biden is getting no credit ahead of November’s election.

Voters in Iowa will fire the starting gun on the Republican presidential nomination process on Monday by holding caucuses to select their choice.

Consumer confidence is widely expected to play a crucial role in the contest. But a poll on Sunday showed that just 13 per cent of Americans feel they are better off under the US president. 

Inflation has declined sharply in 2023 from a high of 9.1 per cent the previous year to 3.4 per cent in December, while unemployment stands at a relatively low 3.7 per cent. Still, less than a third of those surveyed in an ABC/Washington Post poll out on Sunday believe Biden is doing a good job in managing the world’s largest economy.

Despite this, in recent days executives from the country’s four largest banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — said during earnings calls that consumers were resilient.

“The financial health of our consumers remains strong,” Wells chief executive Charlie Scharf told analysts.

BofA chief financial officer Alastair Borthwick said the finances of the bank’s customers remained in good shape, even if most consumers’ accounts were not quite as full as they were in the middle of the pandemic. 

“We see the consumer activity indicating that they’re still in the game,” Borthwick said. “They’re still spending money.”

However, the banks noted that savers had less money in the bank than 12 months ago as they continued to spend, while defaults have started to climb.

“While average deposit balances per customer continue to decline from their peak, they remained above pre-pandemic levels as wage growth has more than offset increased spending. Having said that, there are cohorts of customers that are more stressed,” Scharf said. 

The executives were speaking after their banks reported fourth-quarter earnings that showed that their lending businesses had benefited significantly from higher interest rates. JPMorgan emerged as the biggest winner, with the largest US bank by assets reporting record profits for 2023. 

JPMorgan chief financial officer Jeremy Barnum said their retail banking customers were “fine” but that loan losses and cash reserves had now returned to the same levels as before the start of government stimulus programmes during the pandemic. 

“That means that consumers have been spending more than they’re taking in,” Barnum told analysts. 

He said it was an open question as to whether or not consumers would rein in their spending “in a world where cash buffers are less comfortable than they were”. 

Citi, which also said it could lay off as many as 20,000 employees over the next three years, said the number of its consumers unable to pay back their loans was set to increase and would probably peak in 2024. 

Overall, Citi’s chief executive Jane Fraser told analysts that she expected inflation to continue to fall and the economic outlook to remain positive. “We expect to see growth slowing globally with the US well positioned to withstand a run-of-the-mill recession should one materialise.”

US consumers have had more cash in the bank than in the past thanks to unprecedented government stimulus programmes to cope with the economic fallout from the pandemic. The result has been record low loss rates on loans by the banks.

They have been warning that these savings have been steadily dropping and loan losses rising. 

Bankers warned that keeping the unemployment rate low — about 3.7 per cent — would be crucial to ensuring loan losses remained at manageable levels.

“A very strong labour market means, all else equal, strong consumer credit,” Barnum said. 

In a sign of a worsening credit environment, all four banks reported that the net charge-off rate — the portion of loans with losses that are marked as unrecoverable — had risen in the fourth quarter to the highest level since the pandemic. 

Collectively, the banks set aside more than $8bn in reserves to cover potential loan losses during the final three months of 2023, up from $6.2bn a year earlier.

Barnum said JPMorgan’s $2.8bn provision was primarily driven by loan growth at its credit card business — as banks make more loans they need to build provisions for a certain amount of losses — and “the outlook related to commercial real estate valuations”.

Commercial property, and in particular mortgages on office buildings with low occupancy rates, have been a big concern for lenders since the Fed started lifting interest rates.

BofA and Wells upped the amount of money they provisioned for soured loans, blaming rising risks in the commercial property market.

“Asset quality in commercial remains in a very, very good place, outside of the office sector,” said BofA’s Borthwick. “We feel like we’re doing all the right things with [office loans], but that was a little elevated this quarter.”

Goldman Sachs and Morgan Stanley, whose businesses skew more towards investment banking and money management, report earnings on Tuesday.