In the parlance of these times, and as earnings season commentary has pointed out, time and again:
Consumer credit is normalizing.
The question remains, however, as to what comes next.
The slew of reports from the banks and the card companies have taken note of the fact that delinquency rates are on the rise, though are still below levels seen at the end of 2019, just before the pandemic.
The alarm bells may not be pealing yet, but the trends are worth keeping in sight.
Big banks kicked off earnings earlier in the month, As always, JPMorgan stands out as a banking bellwether, given its status as the largest bank in the United States. The latest earnings materials from the company show the overall credit performance; supplementals note that the 30-day delinquency rate in card services was 1.9%, up from 1.2% a year ago.
CFO Jeremy Barnum said during the call that credit costs were $1.5 billion, reflecting a reserve build of $203 million, driven by loan growth in card services. As he said, “30-day past delinquencies have returned to pre-pandemic levels, in line with our expectations.” The company expects to see the 2023 card net charge-off rates to hit roughly 2.6%, where that tally had been 1.4% last year.
Mark Mason, CFO of Citigroup, said during his own company’s call that “we see that the delinquencies have been trending up, and that kind of gives us a good indication of where loss rates are likely to trend in the next quarter or so.”
Net credit losses of 2.72% on branded cards and 4.53% on retail services, he said, are on track to see a “normalized” rate by the end of the year, getting up to the 3% to 3.25%, 5% to 5.5%, respective pre-COVID normalized rates, per the company’s earnings presentation.
Bank of America
For Bank of America, net charge-offs of $931 million increased $62 million from the second quarter. The boost, as explained by CFO Alastair Borthwick during the conference call with analysts, was driven by credit card losses as higher late-stage delinquencies flow through to charge-offs.
The credit card net charge-off rate rose 12 basis points to 2.72% in the latest quarter, though according to the CFO “it remains below the 3.03% pre-pandemic rate in the fourth quarter of 2019.” He said later in the call that “we’re inching closer to the fourth quarter of ’19. And at some point, that’s going to begin to stabilize. From there, it’s just a question of what does the economy do.”
Charlie Scharf, CEO of Wells Fargo, said that from his bank’s standpoint, “delinquencies have continued to deteriorate at a relatively slow, consistent rate without signs of acceleration across our portfolios. Our base case remains a continued slowing of the economy, but we remain prepared for a wide range of scenarios, given there is still significant uncertainty ahead.” The company’s earnings supplementals show that 30-day delinquency rates in the most recent quarter were 2.7%, up from 1.8%.
Discover Financial Services and Capital One
Discover’s net charge-offs, overall, were 3.52%, up from roughly 1.7% last year.
John Greene, CFO, said on the call that “we continue to see the effects of seasoning of newer accounts, which have higher delinquency rates than older vintages.” The card charge off rate was 4%, up from 1.9% last year; the 30+ day delinquency rate for credit card loans was 3.4%, increasing from 2.1% last year.
And in our own coverage this past week of Capital One’s earnings, we noted that the delinquency rate in Capital One’s domestic card business continued to rise in the third quarter and has returned to its pre-pandemic level.
The 30-day performing delinquency rate in the domestic card business was 4.3% during the September quarter and up from 3% a year earlier.
“Domestic credit card results continue to normalize from the historically strong results we saw during the pandemic,” Capital One Chairman and CEO Richard Fairbank said during the call. After outlining the results, he added, “Both the monthly delinquency rate and the monthly charge-off rate are now modestly above 2019 levels.”
Consumers may find it increasingly challenging to keep up with their credit card obligations and making even the minimum payments.
Not only that, but we’re also headed into a period of financial stress. PYMNTS noted last month that roughly two-thirds of consumers must navigate financial stress during the holidays. As many as 36% of consumers feeling seasonal financial stress use credit products, and 21% say this is their top strategy as they pay for goods and services, and gifts too.