Some banks see new cracks forming in a resilient US consumer

Some banks are seeing new stresses among certain retail customers, hinting at challenges to come as a resilient US consumer navigates a series of challenges in the second half of this year.

Executives from Wells Fargo (WFC), Fifth Third Bancorp (FITB) and Capital One (COF) all said this past week that they are noticing a divergence between the two ends of their customer base, with lower income consumers feeling more pain on several fronts. They cited some credit deterioration, savings declines, and spending slowdowns.

Fifth Third CEO Timothy Spence said checking account data at his Cincinnati-based bank show financial difficulties for lower-income customers are more pronounced for people who don’t own their homes.

“Renters with lower incomes are essentially back to or below pre-pandemic levels of liquidity. There is no buffer left there,” Spencer said Wednesday at a Barclays banking conference in New York.

The strength of the US consumer is a subject of debate across the financial world at a time when economic data has been coming in largely stronger than expected despite the Federal Reserve’s interest rate hiking campaign as the central bank seeks to cool inflation.

Thus far the consumer has been relatively resilient and there is data even suggesting low-income consumer spending has held up better than spending among those with higher incomes. But headwinds are mounting as job and wage growth slow, student loan payments restart, and borrowing conditions tighten.

That could all spell some trouble for banks that have been leaning heavily on consumer lending in recent quarters as companies turn more cautious about the economy. Credit card delinquencies have been steadily rising since 2021, according to Fed data, a steeper climb than any point since 2009 after dropping to multi-decade lows.

“As we sit here today, savings are still, in aggregate, slightly above pre-pandemic levels,” Capital One CFO Andrew Young said this past week.

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Overall savings of his bank’s customers are still slightly above pre-pandemic levels but those with lower incomes “are roughly back” to where they were before the pandemic started. Capital One is a major credit card lender.

Still, though, these consumers are “in a position of strength,” he explained.

Dean Athanasia, Bank of America’s president of regional banking, said consumers still have excess cash in bank accounts that they will continue to spend down through the rest of the year.

“It’s a slow travel down on the consumer side,” he said.

Mike Mayo, a bank analyst for Wells Fargo, said the largest banks have already set aside money for loan losses in a potential scenario where the unemployment rate reaches 5%. It was 3.8% in August, up from 3.6%.

Over the next couple of years Mayo still anticipates loan losses at the banks he covers “almost doubling” though historically still remaining “below the long-term average.”

Banks are starting to pull away from making as many new consumer loans as they have in the past, especially those deemed riskiest.

Another top banker who urged caution about the future strength of the US consumer this past week was Jamie Dimon, CEO of JPMorgan Chase (JPM). He cited the possibility of a prolonged period of high interest rates, rising costs of oil, economic uncertainties facing China, and global fiscal debt.

“We don’t know the full effect of what all of this is going to be 12 or 18 months from now,” he said.

The consumer at the moment is “pretty good” but “to say the consumer is strong today, meaning you’re going to have a booming environment for years, is a huge mistake.”

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