Credit card bankers are not in agreement regarding when the economy will shift into a downturn. For some, everything is rosy; others speak of gloom and doom. If you are a top lender, like Chase or Citi, these are good times. In the middle market, banks like PNC are pulling back from loose lending.
The American Banker reports:
With most U.S. households spending more and paying their bills on time, their creditors are feeling more confident than ever. To hear the CEOs of the nation’s largest banks tell it this week, rarely has the American consumer been in better shape.
But look deeper, and it’s clear that view of the broad U.S. economy has its limits. They’re basing their assessments on clients lucky enough to bank with eight of the biggest lenders, with a combined $11 trillion in assets.
For Chase, things could not be better.
At JPMorgan Chase, which on Tuesday reported the most profitable year of any bank in American history, executives anticipate a paltry 1.76% loss rate on their $504 billion of household loans, filings show.
Five years ago, the bank expected to lose almost $2 billion more on a loan portfolio that was $78 billion smaller.
Wells also shows improvement.
The rate of severely delinquent consumer loans at Wells Fargo has fallen for at least 22 consecutive quarters…
Five years ago, 22% of Wells Fargo’s consumer loans with disclosed credit scores were held by borrowers below 680, while just 15% of loans went to consumers with FICO scores of at least 800, filings show.
Now only 11% are below 680, and some 47% are held by borrowers with scores of at least 800, according to Sept. 30 figures, the most recent available.
The reason? The booming economy.
In many ways, big banks’ flawless consumer loan books represent the underlying strength of an expanding U.S. economy, where wages are rising, and nearly everyone who wants a job already has one.
Our view is, “Make hay while the sun shines, but you must keep the infrastructure ready to react when the downturn comes.” The big deal is that profitability is on the upswing. Enough wind is in the sails of credit card issuers to cover the next few years. At the same time, tighten up credit policies and keep a laser focus on risk. Sooner or later, the tides will shift, and you’d better be ready.
Read Mercator’s recent report Credit Card Profitability: Interest Spreads and Credit Quality Set the Course for 2020, and you will see how spreads and credit quality have returned to the card business.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group