One of the most critical accounting changes in credit cards kicks off on January 1, 2020. That is less than five months away. CECL (pronounced Cecil as in Beanie and Cecil) will have a pronounced effect, at least to some credit card issuers.
Credit Managers need to understand how it impacts their organizations. There is a difference of opinion at top issuers as Compliance Week reports:
- JPMorgan said it would increase its credit loss reserves on its $150 billion credit card portfolio by some $4 billion to $6 billion
- Citigroup’s reserve across its portfolio is expected to raise $400 million to $600 million
- Wells Fargo said its reserves on short-term commercial loans would drop by as much as $1 billion, and its reserve for residential mortgages could fall by $1.5 billion.
- Synchrony Financial also said it expects the new standard to reduce its regulatory capital.
This ain’t my first rodeo, and I am a conservative guy. I like Chase’s numbers myself. I know what it feels like to sit across from a regulator and “whoops” does not cut it.
Mercator has a good primer on CECL, intended for operations people, not just accountants. We think there will likely be a long-term positive impact on credit cards, but capital markets will probably react poorly to the industry during the next five years.
In a January 2018 research report on credit card acquisitions, Mercator Advisory Group forecasted flat credit card loan growth for the coming years, with the U.S. market holding at 430 million accounts. With compression on the credit loss function, this will likely be the high point for credit card accounts over the next decade.
From a credit policy perspective, there is plenty to watch. Interest rate spreads are currently very high, and 2018 Return on Assets popped. Notice the difference between the four top lenders shown above. Chase is very conservative; Wells sees an opportunity.
There is no vote in adapting to the new requirement, but as you begin to think about your 2020 business budgets and personal MBOs, which is probably about now, it would serve you well to understand how your company is dealing with the issue to at least temper your numbers.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group