Big bank earnings show consumers may be losing spending steam

In the wake of earnings reports from major banks like Bank of America (BAC) and Morgan Stanley (MS), a mixed picture is emerging about the state of consumer spending. While the banks have stressed that consumers are continuing to spend despite uncertainty around inflation, there are also signs of rising consumer credit stress.

Bank of America, for instance, reported that its net charge-offs — debts unlikely to be recovered — rose to $1.5 billion year over year, up from $807 million in the prior-year period. At the same time, banks have noted a decline in net interest income, which is the difference between what banks earn on loans and what they pay on deposits.

These figures raise concerns about whether consumers can sustain their current spending habits in an inflationary environment.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance.

This post was written by Angel Smith

Video transcript

SEANA SMITH: Well, first, let's talk about some of the results that we're getting from big banks. And one thing that we're watching is what they're saying about the consumer. Earlier today, we got the latest results from Bank of America and from Morgan Stanley. Both of those, a similar narrative to what we heard from Bank executives last week.

They were pointing to the fact that the consumer is still spending despite the uncertainty playing out right now. CEO Jamie Dimon saying that even if we go into a recession, the consumer is still in pretty good shape. I do want to point out, Maddie, that yes, Bank of America was very constructive, very encouraged by some of the trends, that they are seeing from the consumer. But they did have a bit of a drop here, which you could view as maybe negative revenue for Bank of America's consumer units sinking 5% to 10 billion.

But net charge offs or debts. That's unlikely to be recovered. That rose to 1 and 1/2 billion up from 807 million a year earlier. Executives largely shrugging that off. But, again, the mainly from the higher credit card losses, which is a trend that we should really keep a close eye on as we talk about this potentially higher for longer rate environment.

MADISON MILLS: It points to this bigger question about whether or not these banks have gotten all the juice that they're going to get out of consumers. If you have consumers that are all already having as much credit on hand as they possibly can handle, that's not good for these banks that want to have as much credit as possible in the market. I've been talking about this all morning with Bank of America showing that the FICO score, they require for auto lending are up to 800. For credit cards, that's at 77.77.

So, again, that combined with the fact that net interest income wasn't higher for JP Morgan, the big credit giant on the street. It raises that question about whether or not these are the record numbers that we're going to get from these banks in terms of net interest income or rather in terms of credit holdings from consumers given that the consumer may be starting to buckle under the weight of this inflation out here.

SEANA SMITH: Yeah, certainly, I also want to point out a bit of a reversal that we're seeing in Bank of America stock if we can pull that up here. Initially, the street had been pleased with these results or at least the fact that they were better than feared. We're seeing a bit of a reversal here in shares now off just about 4%.

The earnings call underway. They also had a media call underway earlier this morning. So, again, we're going to continue to monitor that downtick that we are seeing in the price of shares now off just about 4% in today's trading action about 35 minutes into the trading day.