There is no doubt that a credit storm is brewing, but as we say in sunny FLA, that storm might just be a “Category 3”, not a “Category 5.” The trick to surviving is to be prepared, stock your fridge, have extra batteries, and not flinch as the rain comes. In the context of credit cards, add capacity, justify your numbers, and leave no stone unturned in resolving consumer issues, and credit card delinquencies.
Look at the Foundational Credit Numbers
Keep an eye out for the upcoming Mercator Credit Card Data Book, which will recap key market indicators from various sources.
- Focus on growth rates, what credit quality segments have been growing, and how much open credit is available.
- Understand delinquency flows and watch out for upticks. For example, look at loss rates, which are on the upswing but still in the 2% range. Although that metric surged beyond 10% during the Great Recession, remember that anything under 3% is considered good.
- Look at the consumer budget we studied in this Mercator report.
- Watch economic drivers, like savings rates, inflation, and of course, the prime,
Yes, Credit Card Delinquencies will Rise
We will go with TransUnion, a top credit reporting agency, for this metric.
- From a delinquency perspective, TransUnion forecasts serious credit card delinquencies to rise to 2.60% at the end of 2023 from 2.10% at tafter2. Unsecured personal loan delinquency rates are expected to increase from 4.10% to 4.30% in the same timeframe. Serious auto loan delinquency rates are expected to decline more modestly to 1.90% in 2023 from 1.95% in 2022.
And charge-offs will follow but on a smaller basis.
No One has More at Risk in U.S. Cards than Chase
But. Chase keeps a steady ship. This morning, the Motley Fool reported:
- JPMorgan Chase, the largest U.S. bank by assets and a top credit card lender, expects card loan losses to rise significantly this year as credit quality returns to historical norms.
- For much of the past three years, consumers have had excess savings buoyed by federal stimulus payments and because of reduced spending when people were hunkering down to prevent the spread of COVID-19. But as inflation soared this year and people drew down their savings, there have been signs that consumer finances are weakening.
- But it will take time before a loan balance becomes a charge-off, which typically begins when an account is delinquent for at least 90 days. As a result, JPMorgan expects credit card charge-offs to climb from 1.47% of total credit card loans at the end of 2022 to 2.6% at the end of 2023, representing a 113-percentage point jump.
From experience, I can tell you that Chase manages the numbers. There are capacity plans that increase collection staffing requirements. In addition, they have routine backlog studies to ensure collectors can get through volumes.
And, if you ever want to have a bad day at Chase, do not have an explanation for why one basis point in delinquency deteriorated. But, on the other hand, from an absolute value in forecasting, if you improved by a basis point, you should be ready to explain that too. Nobody wants a surprise, good or bad.
The challenge is for more than just top issuers who surfed through recessions with their fifty-year-old businesses, such as American Express, Bank of America, Citi, Chase, and Discover. Instead, the risk lies in firms like Goldman Sachs, which bet against the reliability of metrics such as the FICO Score.
The risk also lies with those needing to prepare for the credit storm. Finally, and most importantly, small issuers will face issues managing the ebbs and flows of the credit card business. In the case of smaller credit card issuers, the upcoming Credit Card Data Book will illustrate how those not in the top 100 class of lenders charge off at three times the rate of leading banks. From where I sit, it is a classic case to consider a credit card white-label program, such as the program U.S. Bank offers smaller issues through their Elavon business. More volume, less risk-with big-bank controls and features.
Here we are in January. We expect things to start deteriorating in June-July. If you are prepared, expect a Cat-3 storm. If not, you’d better hang on to your hat and batten down the hatches.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.