Some of the nation's largest banks don't expect credit quality to normalize to pre-pandemic levels until at least 2024.
Even as U.S. banks continue to build their provisions and some lending segments, such as credit card, begin to see deterioration, some of the largest U.S. banks are bullish on credit quality through 2023, executives said at a recent industry conference.
The commentary comes on the heels of a recent spike in credit card loan delinquencies in the third quarter amid steady card loan growth. In October, all six major card issuers in the U.S. posted higher charge-off rates.
When will credit quality normalize?
JPMorgan Chase & Co. believes credit quality normalization will push out even further into the future, with expectations that credit card loan losses won't rise back to pre-pandemic levels for more than a year, Consumer and Community Banking Co-CEO Marianne Lake said during a conference presentation on Dec. 6.
"Normalization has been lower so far this year than we thought," she said. As a result of the delayed normalization, "we see the sort of entry to delinquency normalizing in mid of next year," she said. "That means that if we're right, losses will normalize over to the first quarter of 2024."
Additionally, the company's card payment rates, a "leading indicator" of credit performance, have remained elevated and stable, Lake said.
Nonetheless, the company will accelerate its reserve build in the fourth quarter to reflect loan growth and a modestly worse economic outlook.
"This is a modest down payment on whatever the end result will be," Lake said.
Regions Financial Corp. doesn't expect charge-offs to reach pre-pandemic levels in 2023, the company's President and CEO John Turner Jr. said during the conference.
"We're anticipating some increase in charge-offs in 2023 toward a more normalized environment but still don't believe we get there in 2023 at this point based upon what we see," Turner said.
Still, the company is seeing mild signs of stress in the office, healthcare and transportation sectors, the CEO said.
Bank of America Corp., meanwhile, still has a "high-quality" credit book and has not seen significant movement in five- and 30-day delinquencies, Chairman and CEO Brian Moynihan said at the conference.
"The reality is you've just not seen the deterioration yet," Moynihan said. "Has it moved up some? Yes, but it's still not near where it was in [2019]. And [2019] was a pretty good credit year."
However, the chief executive did issue some words of caution tied to ongoing economic uncertainty.
"We've got to be careful about being overly confident in either side now. There's a lot of volatility around," he said.
Preparing for a downturn
Even as credit quality remains largely pristine, banks are preparing for a slowdown.
"There are some storm clouds forming over 2023 and we'll, I think, have to be prepared for what could come in terms of slowdown or mild recession," Chairman and CEO Bruce Van Saun said during Citizens Financial Group Inc.'s presentation at the conference.
Citizens is going to be selective with commercial borrowers to ensure they have strong credit standing heading into a potential recession, the executive said.
Similarly, U.S. Bancorp Chairman, President and CEO Andrew Cecere said the company is preparing for a range of possibilities from a soft landing to a deeper recession. At the moment, consumer cash balances and credit quality remain strong, but the company is projecting a slowdown, he said.
"It could be a soft landing. It could be a moderate recession. It could be worse than that. And I don't know, to tell you the truth, what it's going to be and I'm not certain anyone does. But we're preparing for all those scenarios," Cecere said.