How inflation will impact the consumer credit portfolios of the nation’s major banks is a recurring question among analysts and economists. So far, it seems, the overall impact has been muted, though they are preparing for eventual problems.
Some big bank leaders, in third quarter 2022 earnings briefings, have continued to speak of post-pandemic “normalization” of consumer banking behavior as something that is still occurring gradually. At Citizens Financial, for example, 41% of credit card customers pay in full every month. Before the pandemic, 32% paid in full. A Fitch Ratings analysis found credit loss rates for the industry continue to be significantly below long-term historical levels.
In addition, some executives have also acknowledged that their institutions tend to lend to prime and above borrowers. They say that so far significant pain of inflation and rate hikes has not hit those segments as much as people in lower credit brackets.
Regarding the impact of a recession, leaders speak chiefly of taking relatively conservative steps to get ready, such as building reserves.
“We recognize pressure points are building in several areas of the economy that could lead to stress in the future,” said Andrew Cecere, Chairman, President and CEO at U.S. Bancorp. “Borrowing costs are increasing, inflation is high, savings rates are starting to decline and the stock market is well off its highs.”
This leads Cecere to conclude that while conditions remain somewhat favorable today, “it would not be surprising to us to see an economic slowdown develop at some point driven by lower confidence levels, which may lead to reduced spending and business investment.”
Ongoing Debate Between Bankers and Their Economists
It’s an odd time in the banking business, as the twin clouds of inflation and recession, both intertwined with rising interest rates, threaten. And yet on the consumer banking front, trends remain positive in some areas, especially credit cards and consumer spending through debit and credit cards generally. In mortgage lending, while volume has been falling, some large institutions, such as U.S. Bank, are still benefiting from home loans that were in the pipeline already.
Finding the appropriate path through these times for each institution involves internal debate over timing, setting reserves, revising pricing and investment strategy and more.
“I’ve been encamped for a while in arguments with our economics team,” said William Demchak, Chairman, President and CEO at PNC Financial Services Group during the bank’s earnings briefing.
Jamie Dimon, Chairman and CEO at JPMorgan Chase, noted that the debate over setting forward-looking loan reserves under the “CECL” rules involved wrangling between the bank’s economists and credit experts and didn’t necessarily synch with his own views, “because I happen to think that the odds might be different than other people.” (CECL stands for “current expected credit losses.”)
At Citizens Financial Group, Donald McCree, Vice Chairman and Head of Commercial Banking, said that the bank had already “activated our downturn playbook.” This brings in a more intensive level of stress testing of loan portfolios.
The pandemic in some ways was a preparation for what may follow.
“We think [customer] management teams, going through the pandemic, got incredibly focused on efficiency in their businesses,” said McCree. “They cut costs and automated and they built liquidity and they repaired balance sheets and they hedged. They did a lot of things that were prudent from a risk standpoint.”
On the consumer side, Brendan Coughlin, Head of Consumer Banking, said that Citizens is tightening up on credit “on the margins” and working to make sure new consumer credit fits the bank’s risk profile.
“We’re making investments in collections, being ready for an inevitable tick in the wrong direction.”
— Brendan Coughlin, Citizens Bank
Taken as a whole, McCree said, Citizens feels it has built a small buffer against a deep recession.
Charlie Scharf, CEO at Wells Fargo, said the bank expects to see increase in delinquencies, and, in time, credit losses as a result of higher rates and high inflation.
“But the timing remains unclear,” observed Scharf.
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Where Bankers Think the U.S. Economy is Headed
Dimon’s earlier remark about reserves came during a back-and-forth with Mike Mayo, analyst at Wells Fargo Securities. Mayo was laser-focused on Dimon’s warning in June 2022 that the economy seemed headed towards a “hurricane.”
Mayo: “So, let’s just cut to the chase. Where are you versus three months ago? I mean, you certainly got headlines with the hurricane comment and all that. Like you said, you have debt tightening, QT [quantitative tightening], tighter capital rules for banks, you have the trifecta of tightening by the Fed, and then you have wars and everything else. … The stock market supports your view about all the risks out there. But are things better, worse or the same as they were three months ago?”
Dimon: “They’re roughly the same. We’re just getting closer to what you and I might consider bad events.
“And my hurricane, I’ve been very consistent about it. But looking at probabilities and possibilities, there is still, for example, a possibility of a soft landing. … there’s a possibility of a mild recession. Consumers are in very good shape, companies are in very good shape…
“[But] there’s a possibility of something worse, mostly because of the war in Ukraine and oil prices and all the things like that.”
At Citigroup the view is that multiple recessions will hit around the world, with the timing and the depth of each hinging on conditions in each country. Regarding the U.S., Jane Fraser, CEO, was relatively upbeat. Fraser called the U.S. economy “resilient.”
“While we are seeing signs of economic slowing,” said Fraser, “consumers and corporates remain healthy, as our very low net credit losses demonstrate. Supply chain constraints are easing. The labor market remains strong. So it is all a question of what it takes to truly tame persistently high core inflation.”
Fraser’s take: It will take a lot, and will require time.
“We could well see a mild recession in the second half of 2023. We believe the U.S. economy is well positioned to withstand it.”
— Jane Fraser, Citigroup
Stated Bruce Van Saun, Chairman and CEO at Citizens Financial Group: “I would characterize it as a moderate recession rather than a short recession, and the unemployment levels will get up over 6%.”
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Looking at Big Banks’ Consumer Lending Performance
One of the paradoxes of this period is that the rapid hiking of interest rates is working to banks’ benefits, the increases helping to widen net interest margins and raising net interest income. Inflation has also affected payments volume. Even if consumers cut back on amounts or types of purchases, higher prices due to inflation add to dollar volume.
PNC’s William Demchak noted that the third quarter 2022 rise in net interest margin of 32 basis points was the largest sequential rise in over a decade.
An analyst asked Demchak about the health of the bank’s borrowers and if there were any categories the bank expected to pull back from.
“In terms of what we lend to, we just don’t change our credit box,” said Demchak. More specifically, he noted that balances were rising on credit cards, “which is a good thing. People are finally drawing down on credit.”
Here’s a sampling of what some other big bank leaders had to say about credit cards and other aspects of consumer banking:
• At JPMorgan Chase, Dimon said that, “We’re in an environment where it’s kind of odd. There’s very strong consumer spend. You see it in our numbers, you see it in other people’s numbers.”
“Credit card borrowing is normalizing,” Dimon continued, “not getting worse.” Chase reported that average card outstandings rose 6% over the second quarter of 2022 and 18% compared to the third quarter of 2021. Revolving balances were up 15% for the third quarter, which the bank credited in part to new card account originations. Delinquencies were up, but below pre-pandemic levels.
Dimon said consumers’ balance sheets still appeared to be strong and that this might mean that consumers would go into a recession stronger than usual. However, he said that he expects the last of the extra money people have in their checking accounts to be gone by mid-2023.
“It will strain future numbers,” said Dimon.
• At Bank of America, consumer spending for the first nine months of 2022 was up 12% over 2021. While the growth rate fell to 10% during September, that was still strong, and that rate continued into the first half of October, according to Brian Moynihan, Chair and CEO at BofA. Moynihan said that consumer loans overall grew 7% in the third quarter, compared to the previous year, while credit cards grew 12%. Annualized, credit card growth hit 21%. While delinquencies on cards are up, the increase is only slight, according to Alastair Borthwick, CFO.
• At Wells Fargo, credit card spending was up 25% from a year earlier and average balances rose by 21% from the year earlier. CEO Charlie Scharf credited this in part to Wells’ launch of new credit card products on top of the increasing usage of credit cards for purchases. Both factors also contributed to an 8% rise in credit card revenue. Mortgage revenue is off by 52% from 2021, because of lower originations and decreases in related mortgage activities.
• At Truist, growth has been seen in multiple consumer lending categories, including cards as well as its LightStream subsidiary, which makes online specialized fixed-rate personal loans in many categories, from car lease buyouts to tiny home loans to loans to buy horses and horse trailers. Consumer and card balances rose 3.1% over the second quarter.
• At U.S. Bank, CEO Andy Cecere noted that card spending was up about 10% over 2021 levels and about 30% over pre-pandemic levels.