Here is a good read from Bloomberg discussing two trends Mercator Advisory Group raised throughout the year.
- Interest rate spreads on credit cards increased substantially and interest rates trend up, despite a downward trend on the Prime Rate
- Large banks are outperforming smaller banks, particularly as it relates to credit quality
First, the spreads. Interest rates reported by the Fed have increased, yet the prime has been relatively flat.
- Despite a 50 basis point decline in the U.S. 10-year note yield since late July, the average interest rate on credit cards continues to hover close to record levels, newly released data from the Federal Reserve show.
- The U.S. prime lending rate, the rate that commercial banks to charge their most credit-worthy customers, has fallen thanks to easier Fed monetary policy.
- But the spread between the prime rate and the average annualized rate on credit cards widened to a record at the end of August.
- Many issuers have been competing for new customers with richer rewards rather than lower rates. They may also be maintaining this record spread because risks are brewing, underscored by a pickup in delinquency rates at smaller issuers of cards.
Then, there’s delinquency. Top tier issuers look great. Middle market issuers, not so good.
- Fed data show a growing gap between delinquency rates for the 100 largest banks compared with all others. Delinquent accounts for the largest banks were at 2.44% in the second quarter, while other banks saw the rate spike to 6.34% from 5.73% the prior quarter. At 3.9 percentage points, the spread between the two measures is also at an all-time high.
- Credit card issuers have been busy adding customers. Since 2010, more than 100 million new accounts have been created, bringing the total to 486.5 million in the U.S. as of the second quarter. These new accounts and increases in credit availability within existing accounts have increased potential credit card spending power to $3.8 trillion — an increase of $1.1 trillion since 2010.
About a year ago, we raised this issue in an article on PaymentsJournal, noting that top banks carry delinquency rates about a third of where smaller banks stand. One reason is that top banks have been very aggressive in their lending. The aggressiveness allows them to continue to lend as new delinquency occurs.
Another issue has to do with risk tolerance. A common practice by large issuers is to underwrite higher credit lines than their smaller bank peers.
Account features are often on par because platform service providers such as FIS, First Data, Fiserv, and TSYS can help smaller banks with reward programs, wallet tools, and general account features. Where large and small issuers diverge tends to be on the ability to underwrite large credit lines.
Expect to see more on this topic in Mercator’s upcoming 2020 credit outlook, which will publish in November 2019.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
