In late April, after some disturbing monthly charge-off reports from major credit card vendors, we reported that according to the latest data from the S&P/Experian Bankcard Default Index, as of March 2017, the default rate on US credit cards had jumped to 3.31%, an increase of 13% from a year ago, and the highest default rate since June 2013.
The troubling deterioration prompted Moody’s to pen its own report yesterday titled “Spike in Charge-off Rates Indicates a Slide in Underwriting Standards” and as Moody’s analyst Warren Kornfelf writes, the steep increase in credit card charge-off rates in 1Q’17 and 4Q’16 was the largest since 2009, and indicates that “strong underwriting standards in place since the financial crisis have deteriorated, potentially rapidly.”
According to Moody’s, the “the size of the jump was surprising in light of the ongoing strength of the US employment market” unless of course the BLS is chronically, for political reasons or otherwise, misreporting the real dynamics in the labor market, or else the even more chronic failure of rale wages to rise means increasingly more Americans can not even make their minimum credit card payments.
First quarter charge-offs were highest for Capital One Financial, First National of Nebraska and Synchrony Financial (unrated), whose portfolios were already the weakest performing. Charge-offs at Capital One, First National of Nebraska and Synchrony rose to 5.31% (up 1.08% year-over-year), 4.21% (up 0.71%) and 5.40% (up 0.56%), respectively.
Capital One especially stood out, as its Q1 charge-offs almost reached their historical average while Discover and First National of Nebraska’s climbed to just over 80% of theirs; Citigroup rose to about 70%.
Another confirmation there is something very wrong with the consumer (or measures of US economic resilience), receivable growth at most issuers has exceeded U.S. nominal GDP, which totaled 3.7% in 2015 and 2.8% in 2016; when credit growth significantly exceeds nominal GDP growth it raises potential red flags such as aggressive underwriting to drive loan growth.
As noted last month, the results of the Fed’s latest survey of US bank senior loan officers showed a weakening in underwriting standards, coupled with plunging demand for credit cards and auto loans.
In Q1 2017, banks reversed the net tightening that they reported in Q4 2016, the first reversal since 2010. Moodys warsn that the steady and modest loosening of standards from 2011 to 2016 reflected an ongoing period of normalization4, but lending standards and the credit quality of new accounts can change quickly. Additionally, the Q1 2017 loosening has only been matched or surpassed in four quarters since 2012 (Q2 2015 and three 2014 quarters). The only positive news from the Q1 2017 survey was that for the first time in at least seven years, two percent of banks reported that they had tightened their credit card standards considerably
If lending standards continue to degrade, things could get messy in a hurry in the event that the economy takes a turn for the worse, according to Warren Kornfeld, a senior vice president at Moody’s.
“Although card standards were extremely tight in the years following the financial crisis, if underwriting then loosened materially, as the rise in charge-offs suggests, asset quality could continue to deteriorate rapidly going forward, especially in the event of a recession,” said Moodys.
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Whatever the reason for the sudden surge in credit card charge-offs, it’s not the only red flag about the state of the US consumer. Recall CoreLogic’s warning from last month, namely that that stalwart of any viable business cycle, mortgage performance, has finally started to deteriorate…
While loan performance improved across various loan types throughout the first five years of the expansion, over the last year three of the four major types of loans began experiencing a deterioration in loan performance. The exception to the deterioration in credit performance was real estate, which continues to improve. However, a closer look reveals performance is deteriorating, albeit from pristine levels of performance.
… While performance for the 2016 vintage is still very good from relative to the last two decades, it is beginning to worsen. Historically, when the mortgage credit cycle begins to deteriorate it continues to do so until the economy bottoms and the credit cycle begins to improve again.
… and it is becoming clear that the US consumer, responsible for 70% of US economic growth, has finally rolled over.