As you navigate the credit cycle, preparing for what comes next, caution is the best policy.
Not just for lenders, but also for borrowers.
So far in the earnings season, banks and credit card companies have noted that the consumer has remained resilient, that credit trends, measured in delinquencies and delinquencies, are deteriorating, just a little, but not don’t fall off a cliff.
To that end, and digging through filings and commentary, lenders are doing what they need to do, which means increasing their provisions for credit losses. Discover Financial is one of the most recent companies to show that financial performance has been strong and the digital shift continues apace.
But there are some metrics worth watching that point to continued pressures that could stress the paycheck-to-paycheck economy in particular. As for consumers themselves, there is an increased enthusiasm for debt consolidation, indicating a strategic approach of their own to managing the growing burden of debt.
In supplements and gains results the company released last week, the 30-day delinquency rate for credit cards rose 2.1% in the last quarter, compared to 1.8% in the second quarter of this year and 1.5% l last year. And digging a little deeper, we see that the delinquency rate on private student loans was 1.9%, down from 1.6%.
Coming out of a low base
The fact remains that these defaults start from fairly low bases and that the total loan reserve rate stands at 6.7%, better than the 7.7% observed last year. Discover management noted that, in the words of the CFO John Green, the company “sees no evidence of emerging credit stress beyond expected normal normalization. Defaults in our lower premium segment have normalized, but in upper defaults and charges remain below pre-pandemic levels.
In this qualitative assessment, and in our estimation, management alluded to a bifurcation of tensions observed among various cohorts of borrowers. Spending remains healthy, with spend on the Discover network growing 15%, driven by card spend, and in particular, Diners volume grew 34%, reflecting growth in T&E spend. This latest data point echoes the recovery in spending from this vertical, as evidenced by Visa and Mastercard’s own comments.
The delinquency rates show that there is at least some juggling and triage of expenses. As data from PYMNTS showed, consumers would prioritize cell phones and credit card bills over other expenses. Sixty percent would prioritize their phones and 55% would put credit cards at the top of the list. This shows an acknowledgment of the prioritization of credit cards – in fact, tackling more and more of this monthly debt is a challenge. Other PYMNTS data shows that paycheck-to-paycheck consumers are three times more likely to incur credit card debt than non-P2P brethren. Among cardholders who live paycheck to paycheck, 34% of those who have no problem paying their monthly bills and 47% of those who have trouble paying their bills “always” or “usually” have a revolving balance. Only 12% of consumers who don’t live paycheck to paycheque “always” or “usually” use credit.
Loan Consolidation Appeal
Increasingly, debt consolidation and lowering the rates paid on that debt are proving to be a means of relief – caution on the part of borrowers. Discover management said on the call that registered personal loans increased 11.4% year-on-year and 7.4% quarter-on-quarter to $7.7 billion. As CEO Robert Hochschild said on a call, “A rising rate environment is creating a lot of focus on debt consolidation, which is the primary use of our personal loans.”
Looking ahead, management expects loan growth to be in the high teen percentage points, up from the previous low teen estimate, indicating that consumers are still thinking to their options.
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