A slump in U.S. consumer credit is inevitable, and the key question is when it will arrive.
Is the next turn in the credit cycle right around the corner? Or is it still years away?
The answer has big ramifications for the $1 trillion credit card industry, which has enjoyed unusually strong profits in the post-crisis period, but typically suffers during recessions.
At an industry conference in New York, credit card industry executives said Thursday that they still see sunshine on the horizon. But they were also careful to make clear that they are taking steps to prepare for rainy days ahead.
American Express Chief Executive Stephen Squeri argued that the New York-based company is much better positioned to come through a downturn than it was on the eve of the financial crisis.
Substantially more of Amex’s customers had low credit scores in 2007 compared with today, he said, adding that the same is true for customers who have been with American Express for less than two years. That cohort tends to default more frequently than longer tenured customers.
Amex, which has historically focused on wealthy consumers, typically has the lowest loss rates of the large U.S. credit card issuers. Its net write-off rate on loans to U.S. cardholders was 2.4% in the first quarter, up from 2% in the same period last year.
“I guess for the naysayers it’s going to be, ‘Well, let’s see how you go through the cycle,’ ” Squeri said. “My belief is that we will go through that cycle a lot better than we did back in 2007.”
Across the U.S. banking industry, the charge-off rate on credit card loans spiked from 3.73% in the second quarter of 2007 to 10.54% in the fourth quarter of 2009, according to Federal Reserve data.
Following the Great Recession, the industrywide charge-off rate fell below 3%. It has since inched back to 3.65%.
In recent years, U.S. consumer debt has been growing at a faster rate than wages, which suggests that many households are accumulating a tab they will be unable to repay. The consumer credit market has so far been buoyed by the low unemployment rate, which fell to 3.9% in April.
“Although consumers’ financial health is generally strong, there is a risk that they will take on too much credit in the present environment,” analysts at Moody’s Investors Service wrote in a recent research note.
Credit card loans have grown at a faster rate in each of the last three quarters than auto loans have, according to Moody’s. The auto lending market has cooled off somewhat following a sizable post-recession boom.
The New York-based credit rating firm also said that it expects credit card lending standards to deteriorate as bankers grow more complacent. “Lenders have repeatedly proved unable to tighten in time,” Moody’s stated.
So far, underwriting standards across the credit card industry do not appear to have weakened, Capital One Financial CEO Richard Fairbank said Thursday.
But he warned that an oversupply of credit can also lead to higher loss rates, and he noted that McLean, Va.-based Capital One has reined in its loan growth over the last couple of years.
“It massively matters what the supply is out there,” Fairbank said.
In the first quarter, the net charge-off rate in Capital One’s domestic credit card business was 5.26%, up from 5.14% one year earlier.
Capital One’s longtime CEO said that the U.S. economy looks unusually strong in the near term, though he pointed to budget deficits and the impact of rising interest rates as longer-term concerns.
Synchrony Financial Chief Financial Officer Brian Doubles also gave an upbeat assessment of the current state of the U.S. economy. “I think the consumer is strong. They’re spending. Unemployment levels are at historic lows right now,” he said.
Like some of its card-issuing peers, Synchrony emphasized steps that it is taking to prepare for a turn in the credit cycle. Doubles said it is making fewer loans to borrowers with credit scores below 660, which is often cited as the line between prime and subprime consumers.
Synchrony, of Stamford, Conn., specializes in store-branded credit cards, a segment of the card industry that tends to see especially large dips during economic downturns. The firm charged off 6.14% of its average loan receivables in the first quarter, up from 5.33% in the same period a year earlier, after tightening its lending standards in 2016.
“I think the trends are very much in line with our expectations,” Doubles said.