The headline in today’s WSJ sums things up well in ten words: “Everything is Going Wrong All at Once for U.S. Banks,” as the “epidemic triggers risks from low-interest rates, slow loan growth and sliding stock and energy prices.”
Indeed, it is a good time for credit card issuers to break out their portfolio analytic tools and manage risk potential.
A decade ago, banks persevered through a recession and widespread loan defaults. Until 2015, they endured years of ultralow interest rates and slow loan growth that pressured their profitability.
In 2015 and 2018, banks survived selloffs in the stock market. In 2016, the industry came through a collapse in energy prices with a few bruises, but no big busts.
Now, banks face all those threats simultaneously. Many of their businesses mirror economic activity, so falling growth and rising unemployment can dent their profits.
The article breaks out three areas directly affecting consumer credit.
Lower Lending Revenue
Around two-thirds of banks’ revenue, last year came from interest earned on loans and securities, according to data from the Federal Deposit Insurance Corp.
The rates banks charge on some large categories of loans, including commercial and industrial lending and credit-card balances, are tied to benchmarks that have fallen in recent weeks. That threatens to crimp banks’ net interest income.
Falling Loan Growth
Banks might also struggle to make up on loan volume what they are giving up in terms of loan yields.
Throughout 2019, businesses and consumers showed a willingness to borrow, and loan balances at all U.S. banks at the end of the year were up 3.6% from their levels at the end of 2018, according to FDIC data.
The prospect of scores of consumers missing work and forfeiting paychecks also bodes poorly for many of the loans banks already have on their books.
Delinquencies and defaults on mortgages, auto loans, credit cards, and other forms of consumer borrowing tend to rise and fall with the unemployment rate, and any prolonged period of joblessness likely will mean that borrowers fall behind on their loan payments.
We are currently reviewing how events will impact our 2020 Credit Outlook in U.S. card markets. Although it is early in our review because the environment has not settled, it is likely to expect impacts to revenue and Return on Assets, a potential increase in write-off due to higher unemployment.
Revolving debt may rise as households supplement salary shortfalls with open credit. Interest rates actually look likely to drop; most card issuers may be insulated on this metric due to the recent trend in higher interest spreads.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group