Credit card lenders plan to stay in growth mode, saying they detect few causes for alarm in the consumer sector despite lingering recession fears.
To be sure, consumer credit quality has deteriorated. Late payments are rising again on credit cards and auto loans, and banks are being forced to charge off some loans. High interest rates are making it tougher for some consumers to pay back debt.
But the U.S. economy has so far continued to power forward, giving many consumers the ability to keep spending and stay current on their payments. Bank CEOs say consumers have remained resilient despite signs of stress, giving the industry the ability to keep growing credit card loans and avoid a broad contraction of credit.
"I'd say we're seeing a more cautious consumer, but not necessarily a recessionary one," Citigroup CEO Jane Fraser said on the bank's second-quarter earnings call.
Citi, one of the country's largest credit card issuers, had some $195 billion of loans in its U.S. personal banking division in the second quarter, up 13% from a year earlier. Credit card growth was strong at JPMorgan Chase, Bank of America and Capital One Financial.
Consumers remain in "reasonably good shape," Capital One CEO Richard Fairbank said on Thursday.
"We have a very watchful eye on all those negatives," Fairbank said, pointing to persistent worries that the economy will take a turn. But the McLean, Virginia-based lender thinks it's "a good time to keep leaning in" and expanding its card business.
That's not to say the environment is necessarily getting better. Capital One card loans that were 30 or more days late on their payments rose to 3.77% during the second quarter, up from 2.42% in the second quarter of 2022. The company expects some of those delinquencies to turn into actual losses that the bank will end up absorbing.
But Fairbank described that as part of "normalization," adding that it's "very natural" for credit quality to return to pre-pandemic trends.
Consumer lenders benefited from an unusually healthy credit environment during the pandemic. Many consumers had larger savings buffers — thanks to government stimulus and accumulated savings from staying at home — and used that money to pay down debt.
In recent months, however, credit quality has
Delinquency figures at big banks' credit card divisions are hovering around 2019 levels, and while charge-offs remain below pre-pandemic norms, they rose sharply in the second quarter, according to Moody's Investors Service. Average credit card charge-offs were at 2.99% during the second quarter, up from 2.69% in the first quarter.
The quick pace of deterioration is somewhat troubling given that it's happening even though the economy hasn't faltered, said Moody's Senior Vice President Warren Kornfeld. "I really would expect us to be in better shape," he said.
Overall, consumer credit remains "solid," Kornfeld said, but there are "absolutely pockets of consumers that are struggling financially."
Lower-income consumers and those with subprime credit scores have been more likely to see stress. Fifth Third Bancorp has also seen a "divergence" among consumers, with homeowners who locked in low mortgage rates faring better than renters, Timothy Spence, CEO of the Cincinnati, Ohio-based regional bank, told analysts.
While higher-income cardholders are spending big and racking up reward points, others are having a tough time repaying their cards and their balances are swelling, said Greg McBride, chief financial analyst at Bankrate.com. That's a costly proposition given that annual interest rates on credit cards are upwards of 20%.
"Nobody's financing purchases at 20% because everything is just going swimmingly," McBride said. "People are putting purchases on a credit card at 20% out of necessity, not choice."
More signs of strain should emerge as the U.S. economy continues to grapple with the fastest pace of interest rate increases in decades, McBride said. Thus far, the country's employers have continued to add jobs — so consumers are continuing to get the paychecks they need to pay their bills.
Optimism among investors that the U.S. will avoid a recession has increased in recent weeks, but a so-called "soft landing" is not yet assured.
Moody's expects a modest recession could send credit card defaults to about 5% next year, up from 3.5% in 2019. While that would lead to losses at banks, the losses would be far less severe than the roughly 11% charge-off rate after the 2007-09 financial crisis, Kornfeld noted.
Though banks have tightened up their underwriting over the past year, Kornfeld said losses will likely be a bit higher if banks continue growing credit card loans at a strong pace.
"I don't see significant weakness, but … there's a level of concern," Kornfeld said.
