Credit card defaults hit a 13-year high as banks slash credit provisions, risking a potential downturn in future earnings.

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In the current financial landscape, a troubling contradiction is becoming evident. Major banks are reporting impressive earnings, yet an underlying issue threatens their stability: a surge in credit card defaults.

Bank of America (BAC) recently announced a net income of $6.7 billion for its fourth quarter, showcasing growth driven by asset management fees, investment banking fees, and trading revenue. However, a closer look reveals a concerning strategy. BAC reduced its provisions for expected credit losses by 6%, bringing it down to $1.45 billion. This reduction suggests that the bank might be underestimating potential credit losses to present a more favorable earnings report. By doing so, BAC appears to be making its earnings look better than they truly are.

JPMorgan Chase (JPM) and other major banks have followed a similar approach, reporting strong earnings while simultaneously lowering their provisions for credit losses. This practice raises questions about the adequacy of their risk management, especially in light of the rising tide of credit card defaults.

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Credit card defaults in the United States have surged to worrying levels. Credit card lenders wrote off $46 billion in seriously delinquent loan balances during the first nine months of 2024, marking a 50% increase from the same period the previous year. This figure represents the highest level of defaults in 14 years, surpassing the peak of the 2008 financial crisis. The rising defaults reflect a growing financial strain on consumers, despite the strong performance of major banks.

The dissonance between corporate bank earnings and the increasing credit card defaults highlights a concerning disconnect. While banks are reducing provisions for credit losses, signaling optimism about economic conditions, the spike in defaults suggests underlying vulnerabilities in the broader economy. This raises the risk that the next earnings reports might reveal the true extent of these potential losses, which could be significantly worse than anticipated.

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As we look ahead, the challenge for both financial institutions and policymakers will be to address this imbalance. Banks must balance their pursuit of profitability with the need to support struggling consumers. Policymakers, on the other hand, need to consider measures that can alleviate the burden of consumer debt and prevent a potential credit crisis.

Sources:

https://www.benzinga.com/25/01/43026092/bank-of-america-q4-earnings-67-billion-profit-revenue-jumps-15-investment-banking-and-deposit-growth

https://finance.yahoo.com/news/jpmorgan-chase-q4-earnings-investment-132116352.html

https://x.com/DarioCpx/status/1879859010268184690

https://x.com/Schuldensuehner/status/1873723386104627296


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