Mercator Advisory Group has been cautioning about credit quality risk for more than a year, and numbers now point in the direction of higher risk through the end of 2019 and into 2020. Bloomberg reported on erosion today, and it is high time for credit c card issuers to take note. Numbers for smaller banks are leading in the delinquency rise, but when large issuers start to see it, the trend becomes hard to reverse. Consider this:
- Red flags are flying in the credit-card industry after a key gauge of bad debt jumped to the highest level in almost seven years.
- The charge-off rate — the percentage of loans companies, have decided they’ll never collect — rose to 3.82% in the first three months of 2019, the highest since the second quarter of 2012, according to data compiled by Bloomberg Intelligence.
- And loans 30 days past due, a harbinger of future write-offs, increased at all seven of the largest U.S. card issuers.
Capital One’s Founder, Richard Fairbank, knows a thing or two about credit cards. Mr. Fairbank, who launched the company in 1988 has been at the helm since the beginning, which after 30 years is a record, at least among current credit card executives. Bloomberg noted his comments:
- There’s been a “degradation” in credit quality for certain customers, according to Richard Fairbank, chief executive officer at Capital One Financial Corp., the country’s third-largest card issuer. Fairbank said some customers with negative credit events during the financial crisis are now seeing those problems disappear from their credit-bureau reports.
- “We may be looking at data that might not paint the full picture of a consumer’s credit history,” Fairbank said Thursday on a conference call with analysts. “Part of the context for our caution has been not only how deep we are in the cycle but, also, this is the period when there is less information than there once was.”
As a matter of note, both Capital One and Discover saw erosion.
- Capital One said Thursday that its first-quarter U.S. card charge-off rate climbed to 5.04% from 4.64% at the end of 2018.
- At Discover Financial Services, which also reported results on Thursday, the charge-off rate increased to 3.5% from 3.23% in the prior quarter.
On the Discover side, Bloomberg went to the new CEO, who replaced another industry legend, David Nelms.
- “Certainly, this has been one of the longest recoveries, so, in general, we have been contracting credit policy at the margin and tightening,” Discover CEO Roger Hochschild said in an interview. Hochschild said his company has been closing inactive accounts and slowing down the number and size of credit-line increases for both new and existing customers.
We covered some of the warning signs and countermeasures in this classic Mercator Advisory Group document. It is a good time to take a look. Credit cycles must manage the entire collection continuum, from booking to chargeoff, preferably on one platform, such as FICO’s Debt Manager. Work standards need to be audited for effectiveness- and execution. If collection managers can’t handle the flow, queuing needs to be reviewed and it may be time for bringing in external resources.
If numbers continue to erode, it will take issuers two years to correct the flows. Better to do it now than later.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
