US banks are facing a growing challenge as they continue to offload billions of dollars in bad debt that they have given up on collecting. According to the latest data from the Federal Deposit Insurance Corporation (FDIC), US banks reported a staggering $21.3 billion in net charge-offs in the second quarter of the year, with credit card delinquencies and sour commercial real estate loans being the main culprits.
This marks the highest quarterly net charge-off rate since 2013, reflecting a 20 basis point increase from the same period last year. Customers are grappling with higher interest rates and inflation, leading to a surge in delinquencies and defaults.
Leading financial institutions like JPMorgan Chase, Wells Fargo, and Bank of America have individually disclosed significant net charge-offs in the second quarter. JPMorgan Chase reported net charge-offs of $2.2 billion, up from $1.4 billion a year ago. Wells Fargo saw its net charge-offs spike to $1.3 billion, compared to $764 million in the previous year. Bank of America reported net charge-offs of $1.5 billion, a significant increase from $900 million year-over-year.
The FDIC highlights that the overall charge-off rate for US banks now exceeds the pre-pandemic average. Of particular concern is the credit card charge-off rate, which stood at 4.82% in Q2, marking the highest level since 2011. This aligns with a report from the Philadelphia Federal Reserve, which noted a record number of past-due credit card balances in Q1 this year.
Despite the challenges, the FDIC reports that the second-quarter net income for all FDIC-insured commercial banks and savings institutions reached $71.5 billion, a $7.3 billion increase from the previous quarter.
As the banking sector grapples with mounting bad debt and increasing charge-offs, it is crucial for financial institutions to closely monitor their credit portfolios and implement robust risk management strategies to navigate the evolving economic landscape.
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Image Source: Midjourney.