Credit card metrics from May reveal that delinquency rates have exceeded pre-pandemic levels, according to recent findings.
07/05/2023 12:45 P.M.
2.5 minute read
Recent data on consumer payment trends suggests that the path to economic recovery may not be as smooth as anticipated.
According to an article from Seeking Alpha, delinquency rates and net charge-offs in May 2023 have surpassed pre-pandemic levels for several major credit card companies, indicating potential headwinds on the horizon. Analysts are expressing concerns about the normalization of credit conditions and the depletion of excess savings, which could lead to weaker consumer spending in the second half of 2023.
According to the article, May’s credit card metrics indicate that delinquency rates have exceeded pre-pandemic levels at three out of eight major card companies. Capital One Financial, Discover Financial, and Bread Financial all experienced higher delinquency rates, contrary to the usual decline observed in May due to tax rebates. In addition, two companies, Bread Financial and Discover Financial, reported net charge-offs that surpassed May 2019 levels.
Wolfe Research analyst Bill Carcache told reporter Liz Kiesche that he believes it is time to retire the term “normalization” as delinquency rates are expected to continue rising and credit conditions deteriorate.
“We expect delinquency rate formations to continue to rise over the coming months before accelerating later in the year as credit headwinds transition from normalization to degradation,” Carcache said.
Additionally, he predicts a weaker consumer spending outlook in the second half of 2023 as excess savings are depleted across all income groups, except the top 20%. This prediction is echoed by Fitch Ratings, which highlights the significant boost to consumer spending from accumulated savings during the pandemic but expects it to fade soon.
Fitch Ratings estimates that the cumulative stock of excess savings has already fallen by 60% from its peak, and further depletion is likely. Monthly savings flows have been consistently lower than normal since January 2022, with a potential complete depletion of excess savings not expected until Q2 2024.
“This drawdown of excess savings has helped consumers spend a higher than usual share of disposable income, with the savings ratio falling well below 9%,” said Olu Sonola, head of U.S. regional economics.
Fitch also predicts higher income households are likely to retain a substantial portion of their excess savings, impacting overall spending patterns.
Additionally, although delinquencies declined slightly from April, rising net charge-offs have also become a concern. Loan balances have been growing, indicating increased borrowing activity. American Express, Discover, and Capital One reported approximately 20% growth in loan balances compared to the previous year. This growth has led to higher net charge-off rates, reflecting potential strains on consumer repayment capabilities.
What’s Next?
Consumer payment trends are revealing a complex recovery trajectory as these rates continue to surpass pre-pandemic levels for some credit card companies. Analysts warn of a potential shift from credit normalization to degradation, as well as weaker consumer spending in the coming months.
The depletion of excess savings, which has driven higher-than-usual spending, may further impact the economy. As the post-pandemic financial landscape evolves, investors and businesses should closely monitor these indicators and adjust their strategies accordingly to navigate the changing consumer payment landscape.
Read the Seeking Alpha article here.
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