Various COVID-19 countermeasures protect credit card aging as consumers and credit card companies navigate the pandemic’s uncertainty and risks. Payment Deferrals, CARES Act relief, and other countermeasures helped stabilize write-offs, as evidenced by Charge-Off and new delinquency metrics. The fact of the matter is that despite record unemployment and massive business disruption, credit card Charge Offs improved in 3Q20, from 3.89% to 3.55% For those that remember the Great Recession, you will recall credit card revenue contended with 10.54% Charge Offs in Q409. It is a reason that I became a big fan of Jerry Powell.
Sooner or later, credit card issuers will pay the price if and when CARES Act-type programs end.
While Delinquency affects Noninterest expenses and income, the other side of the financial equation is Interest Expense, and therein lies a whole set of new problems.
Mercator Advisory did an extensive dive into interest rate spreads in this report less than a year ago. The short story was that credit card revenue and the ensuing Return on Assets (ROA) metric benefit from the increase in the interest rate spread when interest rates hold low. This action allowed credit card issuers to shield against losses and fuel credit card rewards, and change the tide on falling ROA metrics. The interest rate spreads were at a record level with an average interest rate of 17.14% versus a prime of 4.5% in 2018.
Now comes the issue.
The Federal Deposit Insurance Corporation (FDIC) reports quarterly on bank revenue. Some say the report offers too much, but you will find fascinating details on the innerworkings of revenue and risk when you review it. The report, published December 1, warns:
- Declines in “all other noninterest income” (which includes miscellaneous items such as merchant credit card fees, annual credit card fees, and credit card interchange fees) of $2.4 billion (7.1 percent) and service charge on deposit accounts of $1.3 billion (13.6 percent) partially offset the increase.
In short, the comment indicates stress on the noninterest line, which cushions the revenue loss attributed to the interest spread.
The report also shows loan loss swings that vary substantially based on issuer size. Overall, loans 30-89 days past due were 1.03%, but for issuers with >$250 billion in assets or more was 0.94%. The metric was substantially higher for those with portfolios between $1 and $10 billion, at 2.40%.
There are not too many moving parts in the credit card revenue model. Still, the takeaway is that there will be downward pressure in the remainder of 2020. If the government cannot develop strong countermeasures, expect to see revenue hits on the Charge-Off lines and interest and noninterest revenue.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group