MarsBars
Consumer payment trends are reverting to prepandemic levels, with May’s credit card metrics showing that delinquency rates exceeded the prepandemic level at three of the eight card companies in the table below — Capital One Financial (NYSE:COF), Discover Financial (NYSE:DFS), and Bread Financial (NYSE:BFH).
Looking at net charge-offs, two companies — Bread Financial (BFH) and Discover Financial — topped May 2019 levels.
Wolfe Research analyst Bill Carcache says it’s “time to retire the term ‘normalization’.” Delinquency rates normally decline in May as consumers receive tax rebates, but this year they increased.
“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 wrote in a note to clients.
He sees weaker consumer spending in H2 2023 as excess savings are fully depleted by the end of 2023, “when excess liquidity will be wiped out across all income cohorts except the top 20%.”
That roughly gibes with Fitch Ratings’ view. “The boost to U.S. consumer spending from the cushion of excess savings built up through the pandemic period has been signficant, but is likely to fade soon,” said Olu Sonola, head of U.S. regional economics.
“Fitch estimates that the cumulative stock of excess savings has already fallen by 60% from its peak, and a substantial share of the remaining cushion is unlikely to be spent as it accrued to higher income households,” he said.
Since January 2022, monthly savings flows, on average, have been $73B lower than “normal,” Fitch estimates. “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%,” he said. However, Fitch estimates that it may not be until Q2 2024 when excess savings are depleted.
Overall, though, delinquencies declined from April, to an average 2.48% from 2.53% in April. That’s pretty much in line with the 2.54% average in May 2019. The rising net charge-offs — to 3.41% from 3.18% — come as loan balances are growing.
“Loan growth bottomed in April ’21 and has been accelerating since,” wrote Jefferies analyst John Hecht in a note. Loan balances at American Express (NYSE:AXP), Discover (DFS), and Capital One (COF) each rose ~20% from a year ago.
Hecht has Buy ratings on Discover Financial (DFS) and Synchrony Financial (NYSE:SYF), with Hold ratings on American Express (AXP), Bank of America (NYSE:BAC), Bread Financial (BFH), Capital One (COF), Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM).
With the card metrics now near more “normal” levels and the expectation of a weakening economy, Wolfe Research recommends investors to sell into strength, Carcache said. “We remain most cautious on the low-end consumer.”
He has no Overperform ratings for the card names that he covers, with Peer Perform ratings on American Express (AXP), Bread Financial (BFH), and Discover Financial (DFS) and Underperform ratings on Capital One (COF) and Synchrony (SYF).
| 2023 | 2019 | |||||||
| Company | Ticker | Type | May | April | March | 3-month average | May 2019 | Change in bps |
| Capital One | COF | delinquency | 3.64% | 3.57% | 3.66% | 3.62% | 3.29% | 35 |
| charge-off | 4.50% | 4.26% | 4.16% | 4.31% | 4.89% | -39 | ||
| American Express | AXP | delinquency | 1.10% | 1.10% | 1.10% | 1.10% | 1.40% | -30 |
| charge-off | 1.60% | 1.50% | 1.70% | 1.60% | 2.50% | -90 | ||
| JPMorgan | JPM | delinquency | 0.85% | 0.87% | 0.88% | 0.87% | 1.14% | -29 |
| charge-off | 1.60% | 1.58% | 1.62% | 1.60% | 2.46% | -86 | ||
| Synchrony | SYF | delinquency | 3.80% | 3.70% | 3.80% | 3.77% | 4.00% | -20 |
| adjusted charge-off | 4.90% | 4.70% | 4.50% | 4.70% | 6.10% | -120 | ||
| Discover | DFS | delinquency | 2.77% | 2.75% | 2.76% | 2.76% | 2.33% | 44 |
| charge-off | 3.67% | 3.56% | 3.13% | 3.45% | 3.48% | 19 | ||
| Bread Financial | BFH | delinquency | 5.50% | 5.50% | 5.70% | 5.57% | 5.00% | 50 |
| charge-off | 8.40% | 7.80% | 6.70% | 7.63% | 6.40% | 200 | ||
| Citigroup | C | delinquency | 1.15% | 1.14% | 1.17% | 1.15% | 1.57% | -42 |
| charge-off | 2.06% | 1.99% | 1.67% | 1.91% | 2.74% | -68 | ||
| Bank of America | BAC | delinquency | 1.15% | 1.17% | 1.15% | 1.16% | 1.56% | -41 |
| charge-off | 1.95% | 1.89% | 1.92% | 1.92% | 2.83% | -88 | ||
| Avg. delinquency | 2.48% | 2.53% | 2.53% | 2.51% | 2.54% | -6 | ||
| Avg. charge-off | 3.41% | 3.18% | 3.18% | 3.25% | 3.93% | -52 | ||
