Credit card lenders will face a year of retrenchment in 2024, after consumers swiped and tapped their cards for everything from entertainment and travel to groceries, spurring the U.S. economy to unexpected growth last year.
With the effects of pandemic stimulus payments fading, credit card delinquencies and charge-offs have risen past pre-pandemic levels, and some observers predict that spending and transaction volume will slip this year as borrowers focus on cutting their debt. Bankers will respond by tightening underwriting standards, passing up on some potential growth in their consumer and credit card business.
“We don’t have to slam on the brakes, and we’re not going to do that, but we’re always looking at opportunities,” Marianne Lake, co-CEO of Consumer and Community Banking at JPMorgan, said at the Goldman Sachs U.S. Financial Services Conference in December. “If you zoom in to the lowest income borrowers that have the highest levels of unsecured debt, they are showing some signs of stress that’s above levels we saw pre-pandemic.” Such borrowers make up a tiny part of the JPMorgan Chase’s portfolio, she said, “but we’re tightening there.”
“If you zoom in to the lowest income borrowers that have the highest levels of unsecured debt, they are showing some signs of stress that’s above levels we saw pre-pandemic.”
— Marianne Lake, JPMorgan Chase
The U.S. economy last year shrugged off predictions of a recession, largely thanks to increased credit card spending. According to the Federal Reserve Bank of New York, total credit card balances surged past the trillion-dollar mark in 2023, rising $143 billion to $1.13 trillion. Average loan balances grew for most types of consumer debt, with credit cards accounting for the biggest increase, a 10% jump to $6,501 in the third quarter, according to Experian, which provides consumer credit scores that help lenders evaluate borrowers.
At the same time, more consumers were reported to be in arrears on all types of household debt, except for student loans, with about 8.5% of credit card loans transitioning, on an annualized basis, into delinquency last year. (Student loan delinquencies weren’t being reported as the government weighed policies to ease the debt burden.)
The average balances for all categories of consumer debt rose $2,300, to $104,215 as of the third quarter of 2023, Experian reported.
“This 2.3% increase in total debt balance was modest relative to inflation, which grew by 3.7% over the same period,” Experian said. “Consumers were by and large still able to service those balances thanks to a tighter labor market leading to both higher employment and higher incomes.” Experian noted the average FICO credit score rose one point to 715 in the third quarter from a year earlier.
The Conference Board forecast consumer spending growth will slow in the first quarter of this year and will contract in the second and third quarters.
Investors in Visa Inc., sensitive to the digital payment company’s forecast that growth in transaction volume will slip in the first part of the year, sent shares lower on Jan. 25, even as the company reported earnings that beat analysts’ expectations. Logan Purk, who covers payment technology stocks at Edward Jones in St. Louis, said the stock dipped twice on prospects for slower transaction growth: “Out of the gate, before management effectively said that it was all weather related” in the current quarter; “then when the guidance for second quarter was below expectations.”
Visa stock ended the day at $275.25, off 0.7%.
Lenders’ fourth quarter reports showed signs of deterioration in credit quality.
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American Express said its credit metrics remained strong in 2023, with write offs and delinquency rates still below pre-pandemic levels. While revenue in AmEx’s U.S. consumer service division rose 13% to $7.4 billion, its provision for credit losses jumped 59% to $860 million.
The provision for credit losses at Capital One Financial Corp. jumped to $10.4 billion, up $4.6 billion for the year. Capital One’s charge-off rate for the fourth quarter jumped 213 basis points year-over-year to 5.35%.
JPMorgan Chase reported 4th quarter income of $9.3 billion, as the bank provided $239 billion of credit to consumers. It also reported net charge-offs of $2.2 billion, up from $1.3 billion, driven in part by card services.
Synchrony, an online consumer lender based in Stamford, Conn., reported interest and fees on loans increased 16% to $5.3 billion in the fourth quarter. Its provision for credit losses increased by $603 million in the fourth quarter to $1.8 billion, driven by higher net charge offs.
Herman C. Poon, who follows credit card asset backed securities at Fitch Ratings, said he sees “continued normalization” of credit quality in the pools of securities he follows. After the pandemic, consumers benefited from government stimulus payments, giving them excess savings. With those savings depleted, he said, “now you’re seeing a mild reversion where the consumers are potentially getting a little more stressed making payments.”
Charge-off rates have risen to about 2.5%, from below 2% during the pandemic, he said. But the rates remain well below their peak during the financial crisis of 2008-9, when credit card charge-offs exceeded 8%.
“Credit has normalized but normalized to where we expected and not yet deteriorated. The consumer is in relatively good shape, but the music still hasn’t quite stopped.”
— Marianne Lake, JPMorgan Chase
“One of the big decisions banks need to make is to balance their underwriting decisions,” Poon said. With people relying more on credit cards as prices rise, he said, banks face a choice between building market share market share or improving performance, even it if means sending out fewer card offers.
At JPMorgan Chase, that tightening started last year, with the bank turning down “new-to-credit, thinner credit files, borrowers who had no relationship with us,” Lake said.
“Credit has normalized but normalized to where we expected and not yet deteriorated,” she said. “The consumer is in relatively good shape, but the music still hasn’t quite stopped.”
Stephen Kleege is a financial journalist in Brooklyn, NY. He was Executive Editor of The Bond Buyer, the daily newspaper of municipal finance, from 2013 through 2019 and previously edited coverage of real estate, international equity markets, and Latin American economies at Bloomberg News.