Three Indicators Signal Risk Ahead for the U.S. Credit Card Industry
Credit card transaction volume continues to grow at rapid pace in the United States and revolving debt, debt carried from month-to-month, now exceeds the pre-recession high-water mark. Increased household debt from credit cards can be perceived as a sign of confidence in the economy and a signal of healing for households that became victims of the Great Recession’s unemployment and foreclosure surge, but U.S. consumers now face the confluence of increased liability not just from credit cards but also from auto loans, mortgages, and student loans.
The number of U.S. households is estimated at 126 million by the U.S. Census Bureau, with median income at $56,516, in a total population of 325 million. The New York Times pointed out a 5.2% income increase in 2015, the largest single-year increase since record keeping began. The Times also emphasized uneven growth and noted that when adjusted for inflation, household income was 1.6% lower than in 2007 and 2.4% less than during the “boom of the late 1990s.”Federal Reserve Bank of New York data indicates U.S. household debt rose by $460 billion in 2016, the largest increase in 10 years, with fourth quarter increases of $22 billion in auto loan debt, $32 billion in credit card debt, and $31 billion in student loans.
On its own, this movement is not a cause for alarm, but it should be a warning to issuers their bank card collection infrastructure needs to be ready for an increase in delinquency. The debt trend, when coupled with other indicators, suggests that credit card issuers should prepare for upcoming deterioration in credit quality and fortify their defenses against a potential wave of delinquency that can cause balance sheet and revenue risk.
The rumblings are already here. Bloomberg Markets reports that Q1 2017 results show significant deterioration at Capital One and Discover, where stock fell an average 3% after those announcements. The situation is similar at Citi and at Synchrony Financial, the GE Capital spinoff that focuses on private-label retail and co-branded credit cards. Capital One raised its loan loss provision by 29% to $1.7 billion to cover write-off risk of 5%, the highest in almost 6 years. Discover Networks charge-off rate rose to 2.84%, the highest since Q4 2014.
Loan loss reserve is a critical metric for managing credit card profitability. As delinquency flows through the credit cycle, a bad debt write-off triggers a certain aging level. In the United States, the charge-off standard is met when an account ages beyond the 180-day billing cycle, that is, when the account is 6 months overdue. At that point the account can no longer be considered a viable bank asset and must be written off the balance sheet. Card issuers reserve in advance of the loss to smooth their financials and protect against financial shock when accounts age, the end result being that charge-off directly reduces revenue.
Mercator Advisory Group’s research, U.S. Credit Card Debt: Circle the Wagons and Fortify, discusses the rapid post-recession buildup in consumer credit card debt in the United States and why credit card issuers must ensure their operations are running at full speed to protect against an upcoming wave of potential write-off, which will translate into lower credit card industry profits and balance sheet risk.