Today’s WSJ summarized the condition of the global credit card industry in three simple words that concisely depict the state of the credit card business in today’s world. It is better than my simple view of “Hold onto your hat.”
Delinquency volumes surge, and so does unemployment. When you look at employment numbers published by the United Nations, which indicate “cutbacks equivalent to nearly 200 million full-time workers in the next three months alone”, and you consider the Brookings Institute’s research that “unemployment insurance is failing workers during COVID-19”, there will be tough times ahead.
“Bracing for Impact” is perfect in an environment where Citi’s “new loan loss reserve is equal to 9.5% of outstanding U.S. credit card balances. Citi, a global player in card, realized 16% of total revenue from U.S. cards, booked $4.9 billion into expected loan losses in March. That is bracing for impact.
Chase is also bracing for impact, with $3.8 billion in additional reserves, though Bank of America might be a bit light.
WSJ quotes Roger Hochschild, Discover’s CEO, and while it is rare to see the word “cataclysmic” as a business indicator, what he said was profound and spot-on:
“We have already had significant deterioration,” said Roger Hochschild, Discover’s chief executive, in an interview. “This was very quick and cataclysmic.”
We think credit cards will be under stress for at least two years. Aside from having to adjust the regression models that drive the business because even though models built from the Great Recession are in the same (though likely lower) range than current credit card risk, this time the shift was abrupt and unanticipated.
What we are thinking about now is what will the new credit card offering be like in the future. Will rewards go away, as issuers will not be so keen on sharing interchange with credit cardholders as the world heals from the virus disruption? Is there something that can be done to mitigate the risk of contingent liability from open credit lines ($3.7 trillion open lines in the U.S., $1 trillion in use, and $2.7 trillion in available cash)? To what extent does financial inclusion bring incremental risk? More questions than answers, but we do think ahead.
For now, I’d say the WSJ was elegant in their selection of those three words, “Bracing for Impact.” Write-offs are coming in 3Q and 4Q. Banks are battening down the hatches. The industry is much better off with the regulatory requirements of IFRS and U.S. Current Expected Credit Loss (CECL) requirements.
But, the economy will recover sooner or later. Expect more change, but know that the credit card is a much more viable product than an installment loan, and it will survive this mess.
The real issue is the ability to pay rather than a lack of intent to pay.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.
