Although the coronavirus pandemic has challenged all parts of the economy, I think it is fair to say that the individual consumer has held up much better than most anticipated, at least when you look at loan statistics at banks. Most bank executives and analysts are surprised that there haven't been more loan losses or delinquencies during a recession with nearly 8% unemployment.
Part of that is due to the fact that there has been an unprecedented level of intervention from the Federal Reserve and the government, including $1,200 stimulus checks, enhanced unemployments benefits, and loan deferrals. But as coronavirus cases rise heading into the winter and some states impose new restrictions that could hamper economic activity, can the trends hold up?
Image source: Getty Images.
Credit card deferrals down significantly
A good way to look at how the individual consumer is doing is to examine how credit card loans are holding up at most of the large credit card companies. Credit cards are used to finance a lot of purchases, so if people begin to lose their jobs, they may quickly run into trouble paying off their short-term debt. Credit card write offs are normally higher than other types of loans in normal times, but can really surge in a recession. Consumers also entered the pandemic with a record level of credit card debt.
When the coronavirus hit the economy, the impact on consumers and businesses alike was so quick and so severe, banks almost immediately offered borrowers the ability to skip or put off payments on a range of loans, including credit card loans. Deferrals peaked at the end of the second quarter, but came down significantly during the third quarter.
| Bank | Remaining Credit Card Deferrals 9/30 (Millions) |
Total Credit Card Loans (Billions) |
% of Credit Card Loans | % of Accounts That Exited Deferral and Current |
|---|---|---|---|---|
| JPMorgan Chase (JPM 0.49%) | $368 | $140.3 | 0.3% | 91% |
| Citigroup (C -0.32%) | $1,157 | $146.6 | 0.8% | 86% |
| American Express (AXP 0.07%) | $0 | $113.9* | 0% | 90% |
| Capital One (COF 0.66%) | $309 | $103.6 | 0.3% | 88% |
| Bank of America (BAC -0.13%) | $298 | $79.8 | 0.4% | 91% |
| Synchrony Financial (SYF 5.04%) | $227 | $75.2 | 0.3% | 92% |
| Discover Financial Services (DFS -0.17%) | $0 | $69.6 | 0% | 75% |
Source: Bank financial statements and regulatory filings. * = card member loans and card member receivables.
As you can see in the chart, most credit card borrowers have exited deferrals. Some of these numbers may include small business credit card accounts, but overall is still a good representation of the consumer. Notably, Citigroup still has more than $1.1 billion in credit card deferrals, but for the most part borrowers have either resumed making payments or been categorized as delinquent. The majority of borrowers have resumed making loan payments. With just 75% of accounts that exited deferral back to making payments, Discover has the lowest rate of deferred accounts back to being current on their payments. For every other company mentioned above, that number is above 85%.
This could suggest that the intervention by the government and the Fed has been relatively successful at bridging consumers through most of 2020. Or it could be the result of a much higher personal savings rate built up by the consumer and changing spending habits during the pandemic.
Not that borrowers who entered a deferral program are completely better off now. Synchrony Financial's CFO Brian Wenzel noted that borrowers who were current on their payments when they entered forbearance are 3.3 times more likely to enter delinquency than non-forbearance accounts. Accounts that were delinquent when entering forbearance are 6.5 times more likely to enter delinquency than non-forbearance accounts. But as Capital One CEO Rich Fairbank pointed out, "It would be extremely rare for that group [of deferred borrowers] not to have higher delinquencies" in any downturn.
Lower delinquencies and lower charge-offs
In addition to the decline in deferrals, 90-day delinquency rates and charge-offs (debt unlikely to be collected) in credit card portfolios have also gone down this year compared to 2019, almost across the board (slightly higher at Discover).
| Bank | 90 Days Delinquent % | Credit Card Net Charge-Off Rate |
|---|---|---|
| JPMorgan Chase | 0.69% | 2.92% |
| Citigroup | 1.01% | 3.82% |
| American Express | 0.6%* | 2%* |
| Capital One | .02% | 3.58% |
| Bank of America | 0.68% | 2.97% |
| Synchrony | 1.24% | 4.42% |
| Discover | 0.94% | 3.45% |
Source: Bank financial statements and regulatory filings. * = % of card member loans and card member receivables.
This is again not what you would expect during a recession. During the Great Recession, credit card charge-offs pretty much consistently rose starting in 2006 and peaked at more than 10% in 2010, so the decline occurring right now is certainly an odd trend.
Can it last?
Most banks have said they don't expect significant levels of charge-offs until the back half of 2021. However, at the end of the third quarter, PNC Financial Services Group (PNC 0.29%) CEO Bill Demchak has said he is growing increasingly concerned about the consumer, especially those who were receiving the $600 enhanced unemployment benefits. Demchak said he has specifically seen those account balances start to decline, which is why he thinks a second round of stimulus absolutely needs to happen. Also, it's still somewhat early in regards to loans. It took credit card charge-offs at all U.S. banks a few years to rise from 4% to more than 10% during the Great Recession -- it doesn't just suddenly happen.
But I do think a second round of stimulus could certainly play a big role in pushing off credit card charge-offs even further into the future, perhaps to the end of 2021, because most banks are not currently factoring in a second round of stimulus in their modeling. A second round of stimulus could maybe even change the ultimate number of losses that end up materializing from the pandemic.
