Rising Non-Performing Loans Due to High Interest Rates and Commercial Real Estate Slump
Major U.S. banks have significantly increased their loan loss provisions amid concerns over large-scale defaults by households and businesses due to high interest rates and a downturn in commercial real estate.
According to Bloomberg's tally on the 9th (local time), the six largest U.S. banks?JP Morgan, Goldman Sachs, Morgan Stanley, Bank of America, Citigroup, and Wells Fargo?are expected to have written off approximately $5 billion (about 6.5225 trillion KRW) in bad loans in the second quarter of this year. They have also set aside around $7.6 billion in loan loss provisions to prepare for additional defaults. Both the loan write-offs and loan loss provisions for these banks in Q2 this year are double the amounts recorded in the same period last year.
JP Morgan's combined loan write-offs and loan loss provisions in Q2 this year are estimated at $3.8 billion, a 120% increase compared to $1.8 billion in the same period last year. This is the largest amount among the six major banks. Wells Fargo and Bank of America appear to have more than doubled their amounts during the same period, while Goldman Sachs, Morgan Stanley, and Citibank are estimated to have increased theirs by about 60-70%.
This increase in losses is due to a surge in bad loans caused by aggressive interest rate hikes and a slump in commercial real estate. Bloomberg analysts estimate that JP Morgan's write-offs on high-interest credit card loans in Q2 reached $1.1 billion, nearly double the $600 million recorded in the same period last year. Bank of America's credit card loan defaults accounted for about 25% of its total bad loans.
Wells Fargo, known as the U.S. bank with the largest commercial real estate loan portfolio, reportedly set aside an additional $1 billion in loan loss provisions just this month. Concerns over defaults among real estate companies are spreading to the banking sector due to weak leasing and price declines in commercial properties, including office buildings, coupled with rising interest rates.
Meanwhile, despite the increase in losses from loan defaults, the six major U.S. banks are expected to report a roughly 6% increase in earnings per share for Q2 compared to the same period last year. Christopher McGratty, an analyst at KBW Regional Banks, explained, "This is the result of depositors moving funds to large banks out of concern following the regional banking crisis triggered by Silicon Valley Bank (SVB) in March."
Starting on the 14th, major U.S. banks will begin releasing their Q2 earnings reports, beginning with JP Morgan, Citigroup, and Wells Fargo. Morgan Stanley and Bank of America will disclose their results on the 18th, and Goldman Sachs on the 19th.
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