Consumer credit showed a couple of cracks during the fourth quarter, but it's too early to say whether they are dangerous fault lines or just wrinkles.
In all likelihood faltering consumer credit would be hard on banks right now. Commercial credits cost them a bundle over the past couple of years and growth slackened. So the industry turned to consumers, and that has proven successful - banks have posted record earnings the past four quarters.
But net interest margins are tight, mortgage fees are down, and for all the talk of a pickup in commercial lending, it has yet to materialize on balance sheets. So banks can ill afford rising consumer credit costs.
To this point consumers have paid their bills. Federal Reserve Board Chairman Alan Greenspan gave his benediction in a Feb. 23 speech, saying that "over all the household sector seems to be in good shape."
But given the importance of the household sector to banks, the typical Fedspeak qualifier "seems" takes on additional meaning.
"I don't think the consumers are in a world of hurt, but I don't feel as comfortable as others do," said Jim Moss, the managing director of U.S. banks at Fitch Inc.
But survey results released Friday by Cambridge Credit Counseling Corp. of Islandia, N.Y., are reason for discomfort. The firm found that in February 42% of Americans made either the minimum payment or no payment at all on their credit card bill. Worse yet, the survey's "reality gap" - the difference between those who said that they expected to pay off debt and those who actually did - widened to 12% from 7%.
The Department of Labor's jobs report released Friday is another concern. The U.S. economy added only 21,000 jobs in February, a fraction of what economists expected.
Wells Fargo & Co. chief economist Sung Won Sohn began his analysis of the jobs report with a terse sentence: "This is a terrible number."
There's no debate that the emphasis on building the consumer book has transformed the industry's balance sheet. According to a Feb. 26 release by the Federal Deposit Insurance Corp., commercial and industrial loans fell 3% in 2003, to $922 billion - the lowest since the end of 1998.
Meanwhile, loans to individuals grew 10%, to $848 billion, including a 16% jump in credit cards, to $339 billion. Home equity lines of credit spiked 35%, to $346 billion. Residential mortgages were up 6%, to $1.6 trillion.
"We've packed a lot of debt on the consumer over a three-year period when the consumer has certainly not been getting more from the till at the workplace," said Maury Hartigan, the chief executive of RMA-the Risk Management Association. "My concern and admonition is that with so many institutions in the retail space, and new big ones staking out the retail space, there's going to be a crowding out, or there's going to be potentially a risk problem."
That's why some of the fourth-quarter numbers from the FDIC bear watching. Chargeoffs and delinquencies tend to peak in the last quarter, but seasonality does not seem to fully explain the recent increases.
And though the absolute amounts of delinquent and charged-off loans would logically increase with outstanding loan balances, the percentages have also moved up.
Net chargeoffs on mortgages jumped to 24 basis points of average loans outstanding in the fourth quarter, against just 9 basis points in the third quarter and 14 in the fourth quarter of 2002. It was the second-highest level in the past decade.
Net chargeoffs on home equity lines of credits rose to 23 basis points, from 13 basis points in the third quarter and 17 in the fourth quarter of 2002.
Analysts note that the FDIC numbers capture only what's on the balance sheet of depository institutions, and do not take into account managed portfolios of securitized loans.
But Mr. Moss said low interest rates can delay the appearance of credit weakness, and not just because they lead to relatively low monthly payments.
"When you get into a big refi boom like we had, it resets everybody's credit clock back to zero, especially if you truly clean out your personal debt," he said. "You might be in the same relative degree of financial stress, but now you've got new credit and you've got some breathing room."
He's curious how that new debt will season.
Interest rates will play an important role, especially for home equity lines of credit or HELOCS, which tend to carry floating rates.
"We've been concerned about the very rapid growth in HELOCs," said Tanya Azarchs, a managing director at Standard & Poor's. "Some of that debt is variable-rate, so if interest rates spike up, it might be dramatically more burdensome for the consumer."
She said the home equity numbers do not yet indicate a serious problem to her, but that she's watching the product carefully.
"We haven't seen this through a cycle, it's a new product, and it has been growing really rapidly," Ms. Azarchs said. "That is usually the recipe for the next problem."
Rapid growth makes risk measurement difficult. Losses usually take some time to emerge, and they are quantified against an increasing denominator. It can take several quarters for the losses to catch up.
The Fed prefers to look at debt-service burden, the percentage of household income committed to paying interest and principal on debt.
"The real question isn't 'Has more debt been added?' but 'At what cost?' " said David Fanger, a senior vice president at Moody's Investor Services. "The debt-service burden has not increased for the last couple of years."
But he noted that despite the stability, debt service "is still at a high level."
Though that may be a rational response to low interest rates, when debt is relatively more attractive, it still means there's less room for error.
"When the debt-service ratio is high, households have less money available to purchase goods or services," Mr. Greenspan said in his Feb. 23 speech. "In addition, households with a high debt-service ratio are more likely to default on their obligations when they suffer adversity, such as job loss or illness."
