A study of recent economic data indicates that consumer lenders could be operating in a much less happy environment by this time next year.
"The sky may not be falling, but it sure looks like the roof is leaking," said analyst Gary J. Gordon of PaineWebber Inc., who takes a wary stance on shares of the major credit card issuers and finance companies.
Over the last several years a host of factors, including fierce competition among lenders, have granted consumers the luxury of borrowing more while paying back less.
"Consumers can't keep on doing that forever," Mr. Gordon said. "At some point they have to stop decreasing principal payments, which then limits their ability to borrow."
The sharp growth in new lending may be approaching an end, but consumer lenders' chargeoffs have begun to rise - a development Mr. Gordon said he had not expected to see for several more quarters.
The twin developments could curb the revenue and earnings prospects for consumer lenders next year and beyond, and dampen some of the recent investor enthusiasm for their stocks.
The analyst has "neutral" investment ratings on First USA Inc., Advanta Corp., American Express Co., and Dean Witter, Discover & Co. He has an "unattractive" rating on MBNA Corp.
He also has "neutral" ratings on Beneficial Corp. and Household International, two major finance companies.
Mr. Gordon outlined his concerns in a recent report, during an interview, and in a presentation last week in New York during the American Bankers Association's National Bank Card Conference.
He noted that the top credit card issuers averaged 28% annualized loan growth in the second quarter.
"Sure it feels god now, but did we notice that personal income grew by only 6% at an annualized rate?" he asked.
Mr. Gordon studied national debt burden data to resolve why total consumer debt as a percentage of personal income is at a record level while debt repayments, also as a percentage of personal income, are far below record levels.
He concluded that borrowers were helped by the 1992-93 fall in interest rates, which allowed them to lower their mortgage payments through refinancing. That freed up monthly income to service more debt.
Perhaps even more, borrowers have benefited from the competitive price- cutting on credit cards and other loans. "There are no hard statistics here, but we guess that lenders have shaved off at least a percentage point in loan yields over the past five years," he said.
But the key factor is that debt repayments have fallen because principal payments have been declining since mid-1993 as borrowers have stretched out debt, often under easier terms.
Mr. Gordon thinks the repayment rate has reached its cyclical low and must turn up again soon. Indeed the rate appeared to stabilize in the second quarter, perhaps poised to rise after its two year fall.
And one trigger for the rising repayment rate will be the now- rising chargeoff rates. Those rates will eventually make lenders "more cautious about extending debt maturities," he said.
Meanwhile, another economic indicator, the Conference Board's consumer confidence index, is pointing to conditions that customarily slow down consumer credit growth.
The confidence index regularly asks consumers for their views of present economic conditions and their expectations about the future.
Often, results of these two indexes are averaged together, but Mr. Gordon compared them instead.
He noted that when the present conditions index exceeds the future expectations index, an economic turndown typically follows two years later.
This "future less present" index turned negative in the middle of 1994, "spelling trouble for 1996," Mr. Gordon noted.
He said the measure also appears to be an "an excellent predictor of consumer loan growth," and that it points to "much slower consumer loan growth" in 1996.
In fact, investors may have gotten used to a faster-than-normal growth rate of consumer debt, he said.
"All things being equal, consumer debt should grow at roughly the rate of nominal personal income growth," he said. That has been around 5% to 7% annually, which would be "very disappointing to investors" if matched to loan growth.
Several factors could offset a fall in consumer lending, Mr. Gordon noted. Interest rates could fall further, lenders could get more efficient and pass their savings on to customers, and the pool of borrowers itself could widen.