Everyone knows about inflation. If you are a banker, you can see signs as the U.S. household net worth begins to decline or that revolving debt is starting to surge again, this time at an annualized rate of 11.6%. You probably experienced sticker shock at the grocery store as a consumer. On the three benchmark items that I look at, a pound of sirloin steak, a gallon of milk, and a pound of delicious apples, inflation is far from over. How is this affecting credit card delinquencies?
In short, people pay more with cash which is not keeping up with the inflation rate.
The downstream issue is that credit card delinquency will increase, and lenders will need to tighten their lending practices when consumers need access to credit lines to keep afloat.
Credit card delinquency numbers indicate rising risk. The good news in the numbers is that consumers heavily repaid their debt obligations when the CARES Act flooded accounts with tax benefits, consumer relief, and employment protection. The historic low for credit card delinquency since 1980 was in Q3-2021 when delinquency was 1.56%. Three consecutive delinquency increases occurred since then, with the latest numbers at 1.81%.
But specific niches are more sensitive than others. As the recession unravels, those at the lower ends of the credit quality spectrum and those with smaller household budgets will likely erode quicker than those above the median household income level of $70,784.
Looking at the more vulnerable segments is the canary in the coal mine for credit policy managers. First, consider the erosion discussed yesterday with the Apple Card and Goldman Sachs’ aggressive lending to subprime FICO Scores (>660). Now, think about the private label credit card (PLCC) market. Mercator Advisory Group deeply delved into the PLCC market in this classic.
Two large PLCC companies, Bread Financial (formerly Alliance Data) and Synchrony, show signs of stress. According to Seeking Alpha Bread Financial,
- Bread Financial (NYSE: BFH) said Thursday that its credit card delinquency and net charge-off rates for August rose from a month ago to the year-ago period.
- The delinquency rate climbed to 5.3% from 4.8% in July and 3.6% a year before.
- Its net charge-off rate also came in at 5.3%, up from 4.5% in the prior month and 4.0% in August 2021.
Now, consider Synchrony, Bread’s head-on competitor:
- Synchrony Financials’ (NYSE: SYF) credit card delinquency and net charge-off rates increased in August as loan growth came in stronger-than-expected, according to an SEC filing Monday.
- Its delinquency rate for August rose to 3.1% from 2.9% in July to 2.3% a year before, indicating that credit quality continues to normalize from historically low levels during the Covid-19 pandemic.
- The adjusted net charge-off rate was 3.1% in August, up from 3.0% a month earlier and 2.4% in the year-ago period.
Credit policy managers are now building their 2023 delinquency and charge-off budgets. Keep in mind that things are starting to bubble. The top one hundred banks are now at a healthy 1.84%. Smaller banks, not in the top one hundred, are at a dismal 5.98%. If you are planning your 2023 MBOs, adding one hundred basis points is probably not a bad idea for top banks. And for smaller banks, unless there is immediate corrective action, expect the numbers to approach the record levels experienced in the Great Recession.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.