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.
Roughly a decade after being burned by the most punishing financial crisis since the onset of the Great Depression, it's increasingly clear that the nation's largest lenders are targeting a narrower slice of consumers: The wealthy and those with excellent credit.
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. The rate of severely delinquent consumer loans at Wells Fargo has fallen for at least 22 consecutive quarters, while at Bank of America Corp. soured household debt has dropped 23 quarters in a row.
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. Bankers' confidence that their loans will be repaid also reflects optimism about this year, when expectations are for a tight labor market, rising wages and continued gains in consumer spending.
"In the history of banking, we probably have the most pristine amount of credit," Richard Hunt, chief executive officer of the lobbying group Consumer Bankers Association, said Wednesday during a CNBC interview.
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 shift is largely in response to post-crisis pressure from regulators and investors to reduce risk and avoid dicey activities. But in cleaning up their balance sheets, major banks are raising new questions: Are they fulfilling their role to power the economy if swaths of the country struggle to get credit?
Few financial products better exemplify big banks' retrenchment from lending to households with spotty credit or few resources than government-insured mortgages, such as those backed by the Federal Housing Administration. Over roughly the past decade, non-banks' share of mortgages packaged into bonds issued by Ginnie Mae has more than doubled, giving them almost four times the market share of banks, according to a June report by Ginnie Mae.
Nationwide, four in 10 adults don't have the cash to cover an unexpected $400 expense, according to a 2018 survey by the Federal Reserve. At Bank of America, the average balance of its checking accounts is "$7,000 plus and growing," Chief Executive Officer Brian Moynihan said on the lender's earnings call this week.
"We remain focused on prime and super-prime," said the bank's chief financial officer, Paul Donofrio.
Things are so good that even Citigroup Inc., which in recent years pulled back from being a nationwide consumer lender, now wants to return to that business, CFO Mark Mason said on the company's earnings call.
Whether considering sentiment, spending levels, or their ability to make loan payments, "the U.S. consumer remains in very strong shape," JPMorgan CFO Jennifer Piepszak said on the bank's earnings call.
Around a year ago, PNC Financial Services Group Inc. bucked the trend and started to lend more to riskier households, which typically pay extra to borrow because of their higher default rates. The bank gave up about six months ago.
"We aren't a subprime lender," CEO Bill Demchak said on the bank's earnings call. "We don't understand it. We don't want to be that person."
