How Long Will Credit Card Borrowing Defy ‘Economic Gravity’?

Inflation, higher rates and an uncertain economy have many Americans worried but the effects haven't surfaced in credit card portfolios. In fact, major lenders are still waiting for 'normalization' to return to the credit card market.
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At big-bank investor events stock analysts keep asking, “When are cards going to head south?” They’re expecting movement due to inflation, rate hikes and the threat of recession.

So far, going by research from Fitch Ratings and the responses of officials from seven major banks at analyst sessions, cards haven’t felt much of anything in terms of bad credit trends.

Credit performance has been very good, according to Andrew Cecere, Chairman, President & Chief Executive Officer. “We’re not seeing any indicators of any weaknesses,” he told analysts.

In fact, the more immediate question the bankers themselves have had is when the behavior of card users will return to something more like “normal.” There is a certain amount of ongoing astonishment regarding how the numbers are working so well in credit card lending when many expected “gravity” to take over.

Credit Card Outstandings Lag Strong Spending Growth

Outstanding balances are an issue in the credit card business right now, because of the impact on interest income

“Outstandings are almost back” to pre-pandemic levels, according to Richard Fairbank, Chairman and CEO at Capital One, speaking at an analyst meeting. Then he posed a key question: Since consumers have been increasing their credit card spending, why does the growth in card outstandings continue to lag so far behind where past experience suggests it should be?

“It’s because of one of the metrics that people didn’t talk about much, before, but which has become a centerpiece of conversation these days: payment rates,” said Fairbank.

The rate at which consumers pay their balances has increased since the pandemic, Fairbank and other banks’ officials report.

“That’s a very good thing, because it reflects healthy consumers,” said Fairbank. “But it does slow down outstandings growth, which explains why purchase volume has been ahead of outstandings growth.”

A late June Fitch Ratings report noted that for the largest credit card issuers payment rates “remained elevated by historical standards.” Payment rates averaged 38.3% in May 2022. The 10-year average seen in the years before 2020 came to 24.8%. That translates to the payments rate running more than 50% beyond “normal.”

Indeed, “revolver rates are still pretty darn low,” said Fairbank.

“We’re seeing good credit card spending, which is helping balances a little bit,” said Mike Santomassimo, CFO at Wells Fargo. “People are definitely out spending. You can see it in New York City. Try to get a restaurant reservation these days. It’s not the easiest thing in the world.”

Citigroup CEO Jane Fraser told analysts that card spending was running at growth rates above 20% in the first part of 2022. She also cited people eating out as a factor in that growth.

Travel Impact:

Travel spending lagged other categories but has improved in 2022 and some institutions are seeing strong growth from this sector.

“Travel and entertainment is especially strong,” said Holly O’Neill, President, Retail Banking, at Bank of America.

Indeed, American Express, considered the top T&E spending card organization, reported that its first quarter 2022 volume in that category was up 114% year over year, according to a report by Fitch Ratings. The same report indicated that Amex’ non-T&E volume was only up 19% year over year.

At U.S. Bancorp, Cecere stated that while card spending was up 35% over pre-Covid levels, payment levels come in around 37%. More typically the bank would be seeing payment levels in the low 30s.

Inflation accounts for some of the increase in spending, according to the Fitch report. O’Neill noted that rising gasoline prices, for example, have resulted in higher spending, with a more severe effect on lower-income cardholders.

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Anticipated Angst Hasn’t Kicked in Yet

Bankers speak of several factors helping to keep card payment rates up. Leftover stimulus funds and pandemic-era savings remain a factor, though a substantially lessening one. Very low unemployment has also helped. The impact of the latter on historically lower wage jobs, creating an employee’s market, has led to increasing wages for those workers. This has had an effect on their payments on credit cards.

Fairbank said the slow pace of normalization has been extraordinary, but he believes it will be kicking in.

“We have been saying for a long time now that normalization has to happen,” said Fairbank. “The consumer cannot sustain the extraordinary credit performance that they have had up to this point.”

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Credit Quality Continues Strong on Card Portfolios

“Credit performance for the largest credit card issuers has been exceptionally strong over the past two years,” the Fitch report stated, “with chargeoffs for most issuers at multi-decade lows and tracking at roughly one-half of pre-pandemic levels.”

Some institutions tend to skew towards better credit risk categories. Cecere pointed out that U.S. Bancorp tends to have prime and super prime borrowers in its card base.

“Our net chargeoffs are at lower levels than seen in the past, although that will normalize over time.”

— Andrew Cecere, U.S. Bancorp

“We are not yet seeing anything in our data, including in early delinquencies, that would point to an acceleration in credit metrics,” said Marianne Lake, Co-CEO-Consumer and Community Banking, JPMorgan Chase.

“We are not seeing any signs of cracks,” said BofA’s O’Neill. “In fact, consumers, especially in our mass market segment, are showing significant signs of strength as you compare them to pre-pandemic conditions.”

“We’re not seeing anybody running up credit,” O’Neill continued, “and that would be one of the first signs that things are really shifting. You’d see clients running credit up higher than they have over the last couple of years, but we haven’t seen that.”

“Capital One, relative to a lot of issuers, plays more broadly across the credit spectrum,” Fairbank said. Roughly 30% of the bank’s portfolio has FICO scores of under 660, which is considered subprime.

Fairbank did not see an appreciable increase in risk in that part of the portfolio, but suggested that newer accounts could be where weakness would arise as the impact of inflation and rising rates begins to erode credit. More seasoned accounts tend to perform better, he explained.

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