Today’s read comes from the WSJ, which wonders why consumer credit scores look good in a tough economy.
- Millions of Americans lost their jobs and skipped debt payments this year. You wouldn’t know it looking at consumer credit scores.
- While the coronavirus was pummeling the U.S. economy, Americans’ credit scores—a metric used in nearly every consumer-lending decision—were rising.
- The average FICO credit score stood at 711 in July, up from 708 in April and 706 a year earlier, according to Fair Isaac Corp., the score’s creator. Early estimates suggest the average score has held steady through mid-October at the July level, which is the highest since FICO began keeping track in 2005.
The CARES Act and related payment holidays are what propped up consumer credit. Numbers from the Federal Reserve confirm steady performance to contain writeoffs. If you review the latest numbers published by the Fed, Q1 credit losses were 3.77%. Q2 credit losses were only 14 bp worse, landing at 3.91%. If you peel back this number to show large bank performance to small banks, the numbers are quite different.
- Large banks, the top 100 issuers, including Bank of America, Capital One, Chase, and Citi, held the line at 3.63% in Q1 and slightly worse at 3.80% in Q2.
- Unfortunately, smaller banks, not classified in the top 100, have been struggling with high loss rates since 2017. For the same period, losses were 7.46% for Q1 and 7.99% for Q2.
The variance between large and small issuers is a different issue, as evidenced by the charge-off rate similarity between top banks and the aggregate. Top banks drive the total.
A FICO expert responded appropriately to the question of why do scores look good when the economy is in a challenging position:
- “First, the macro stress occurs, and then it takes a few months for the strain to show up in people’s credit reports,” he said. Deferment programs and government stimulus “are having a further effect of pushing out that stress for many people.”
That issue is reflected in current bank reporting. Last week, the WSJ reported on Chase’s 3Q profits.
- A curious thing happened in the middle of the coronavirus crisis: America’s biggest bank posted a higher profit than it did a year ago before the pandemic ravaged the economy.
.. . Jaime Dimon called for continued help.
- “A good, well-designed stimulus package will simply increase the chance we get better outcomes, but there is so much uncertainty we’re not saying that that’s definitive,” Mr. Dimon said on a call with reporters.
- JPMorgan has nearly $34 billion set aside for potential losses. If the economy recovers apace, that might be $10 billion more than it needs, Mr. Dimon said. In a double-dip recession, he said, the bank could need another $20 billion in reserves.
As for credit cards:
- For instance, credit-card loans, the area both banks say is most susceptible to the pandemic, are performing better than a year ago, with only 0.69% of JPMorgan’s loans and 1.01% of Citigroup’s 90 days late. JPMorgan, Citigroup, and others have temporarily let customers skip payments on credit cards and other debt, but both banks have said the majority of their card customers are out of those programs and paying on time.
- At both banks, the Wall Street operations fared better than the consumer units. That follows a pattern that has shaped the banking industry throughout the recession. Consumers have struggled. But traders have benefited from uncertain markets, and investment bankers have profited as nervous companies raise cash and sell stocks and bonds to ride out the downturn.
Still, if I were a credit manager sitting in a Chase or Citi policy office, I’d count on the FICO score every day—the trick is to know that the score reflects where the account is at the moment of scoring. And with that, you can drive business functions such as acquisitions, collections, credit policy, and securitizations.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group