The latest quarterly report from the Federal Deposit Insurance Corporation (FDIC) revealed escalating credit card and commercial real estate debt posing risks to the US banking industry. Although overall bank profits exceeded $1 trillion for the first time, significant headwinds remain.

One troubling metric was the net charge-off rate, which measures debt banks do not expect to collect. This rate climbed to 0.65%, the highest in a decade, with credit card and commercial real estate loans as the primary drivers. Charge-off rates reflect anticipated loan losses that eat into profits.

The FDIC stated that deteriorating loan portfolios, especially for office space and other commercial real estate, “warrant monitoring” given risks from inflation, interest rate volatility, and geopolitical tensions. Non-current loans also rose 0.86% in the fourth quarter.

While unrealized losses on securities declined over 30% and deposits increased 1.1%, providing some positive signs, the FDIC chairman warned of “significant downside risks” facing banks.

Credit card balances have surged as consumers grappled with high inflation, tapping revolving credit to make ends meet. This dynamic increases delinquencies and charge-offs for issuers. Commercial real estate exposure is another area of concern due to the pandemic’s disruption of office utilization and property values.

The FDIC’s “problem bank” list grew to 52 institutions, though their $66 billion in assets represented just 1.1% of the industry total. Overall 2023 bank profits dipped 2.3% annually but remained above pre-pandemic levels.

Information for this story was found via the FDIC, Reuters, and the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.