The often thankless job of a collection manager deserves note today, with 184 days remaining in 2021. Sure, collections do not have the panache of credit card acquisitions or the high-tech feel of innovating the latest technologies behind the scenes. The collection people execute risk management policies.
And, today, as in many markets worldwide, what is in the collection working queues represents the entire risk for the calendar year 2021. Therefore, the 185 days past due collection requirement remains applicable, and any credit card delinquency that cycles in tomorrow is 2022 credit risk.
Forget about the financial crisis for a moment and consider what is on your plate.
The latest numbers published by the Federal Reserve indicate that credit card delinquency for 1Q2021 was a meager 1.99%. Here you can see that the metric is at the lowest level since at least 1Q1991. Write that one down as you start forecasting your 2021 bonus. The peak for delinquency during those 30 years was 6.77% delinquency 2Q2009. Remember how that went. If you were running or working in a call center, you would remember that the 6.77% turned into loss rates north of 10%.
Not today. With the current credit card charge-off rate at 2.88%, I’d bet the 2021 final rate will be closer to 2% than it is to 3%. With the 4Q2020 final credit card charge off rate sitting at 2.67%, expect an improvement YoY of about 30bp.
That 30bp improvement is likely to make a collection line manager smile as they prepare for their MBO review. But, for now, enjoy the limelight. 2022 will not be a piece of cake, and by the time 2023 rolls around, your collection operation will contend with the ugly issues of inflation and increased interest rates.
In the interim, expect your boss to be even happier than you. As CNBC reports, “the Federal Reserve gives U.S, banks a thumbs-up as 23 lenders Easily Pass 2021 Stress-Tests” with the most recent stress testing results.
- The central bank said that the scenario included a “severe global recession” that hits commercial real estate and corporate debt holders and peaks at 10.8% unemployment and a 55% drop in the stock market.
- While the industry would post $474 billion in losses, loss-cushioning capital would still be more than double the minimum required levels, the Fed said.
- The Fed, in releasing the results of its annual stress test, said all 23 institutions in the 2021 exam remained “well above” minimum required capital levels during a hypothetical economic downturn. Bank shares popped after the release; the KBW Bank Index rose 1.5% at 5 p.m.
This means credit card issuers can release some loan loss reserve money to smooth out the suppressed revenue numbers caused by reduced revolving debt. As a result, interest income this quarter will be weak, and these funds can help.
So, June 30, which is also the anniversary of the day Gone With the Wind, was published. In addition, Albert Einstein published his theory of relativity (“Zur Elektrodynamik bewegter Körper”), add another important milestone to your calendar: National Credit Card Collection Day.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group