What happened

Shares of several consumer lending stocks dropped this week after recession fears began to get more prominent amid rising bond yields.

For the week, shares of the credit card lender Capital One Financial (COF -0.73%) had dropped nearly 15% as of 2:45 p.m. ET Thursday, according to data provided by S&P Global Market Intelligence.

Shares of another credit card lender, Synchrony Financial (SYF -0.25%), traded 12.5% lower, while shares of the artificial intelligence-assisted loan company Upstart Holdings (UPST 0.69%) were down more than 15%.

So what

For consumer lenders, losses can spike due to rising interest rates and an economic downturn. While credit is still holding up well right now investors are worried about a potential recession in 2023 and how that might elevate loan losses, which are on the rise as of late.

Person looking at downward stock chart.

Image source: Getty Images.

In October, Capital One reported that its credit card delinquency rate jumped 20 basis points (1 basis point = .01%) to 3.17%, while its net charge-off rate (debt unlikely to be collected and a good indicator of actual loan losses) jumped 70 basis points to 2.93%.

"Loan growth remained strong and metrics are still below pre-pandemic levels but charge-offs and delinquencies are increasing rapidly," Bank of America analyst Mihir Bhatia wrote in a research note to clients, downgrading the stock to a neutral rating. Bhatia also noted a sequential increase in net charge-offs that was 51 basis points above normal October seasonality and "faster normalization than seen in prior months."

Synchrony saw a more modest step up in its credit card delinquency rate in October but its net charge-off rate jumped by 40 basis points.

Upstart, which originates personal loans and does not have a bank charter like Capital One and Synchrony, also reported rising delinquencies on its earnings report last week and is dealing with a host of other issues from borrower demand to funding issues.

Not only are delinquencies and charge-offs starting to normalize, but credit card balances have been surging this year. Total outstanding revolving balances, which include credit cards, rose to $1.16 trillion in September, which is above pre-pandemic levels.

With much of this recent growth in balances likely attached to higher rates and the economy expected to run into trouble next year, investors are likely trying to air on the side of caution.

Now what 

Obviously, there is a lot of uncertainty right now not knowing what kind of environment the U.S. economy will find itself in next year. That said, Capital One and Synchrony seem to be taking a prudent approach when it comes to reserving for loan losses.

Furthermore, they both trade under 6 times forward earnings. Their earnings estimates could be cut, but I think the risk-reward proposition is quite reasonable here.

As for Upstart, I still have no interest in the stock until the company can solve its funding issues and further prove its credit underwriting models.