Banks brace for consumers unable to repay loans

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Banks are bolstering their provisions against credit losses, fearing that consumers may late pay or repay their loans and credit card bills.

Fears of a recession continue to grow as interest rates have risen rapidly. The Federal Reserve, which has raised interest rates by 3 percentage points since March, is expected to raise rates by 0.75 percentage points in November and possibly 0.5 or even 0.75 points more in December.

Banks brace as Main Street hammered by high inflation; combined with rising interest rates, consumers may find it difficult to repay their loans.

Higher interest rates result in more of a payment being allocated to interest instead of the principal amount borrowed.

Consumers have started to use their credit card more often to make purchases. Delinquency rates increased to 1.57% and average balances per consumer increased to $5,270. That balance has risen significantly from 2021, though it’s still below pre-pandemic levels, according to data from credit reporting firm Transunion.

Delinquencies in credit card payments declined at the start of the pandemic, but in the fourth quarter of 2021 consumers reverted to past habits.

Consumers in the study group made increasingly smaller payments, showing that “the deterioration in consumer liquidity that ultimately fell more than 90 days late occurred as early as 9 to 12 months before a serious failure”.

The study tracked 5.9 million consumers and their ability to fund their payments from Q3 2019 to Q4 2021.

American Express sets aside more

In its third quarter earnings report, American Express (AXP) said it set aside more funds for bad debts than expected, and the financial services giant reported rising charge rates.

The company said its provision for credit losses was $778 million, including a $387 million increase in its reserves, compared to a release of reserves of $393 million in 2021.

American Express said the reserve increase resulted from increased spending in its card business, but also to prepare for slower growth in the global economy.

“Our credit metrics have also remained strong even as we steadily rebuild loan balances, with defaults and write-offs continuing to be low,” CEO Stephen Squeri said in a statement.

“We have not seen any changes in our customers’ consumption behaviors, but we are aware of the mixed signals in the broader economy and have plans in place to pivot if the operating environment changes dramatically, as we have done in the past.”

Auto lenders expect late payments

Allied Financial (ALLY) an online-only bank and lender, reported both lower earnings and higher-than-expected bad debt write-offs.

The bank said its share of retail loans and net write-offs doubled to 1.05% from 0.54% in the second quarter. The figure was 0.27% in the third quarter of 2021.

On October 19, Ally said he expected his total loss rate over the cycle to be between 1.4% and 1.6% and near the upper end.

During Ally’s earnings call. CEO Jeffrey Brown described the macro situation as a “pretty fluid environment.”

Auto loans are a metric that financial analysts often use to gauge consumers’ likelihood of paying off a debt, because repossession of cars can occur within 90 days of nonpayment.

Steadily rising car prices, especially during the pandemic, have pushed monthly payments to $700 as consumers seek “ever larger and more expensive vehicles,” said Greg McBride, chief financial analyst. from Bankrate, the New York-based financial data company. The street.

Consumers paying off the principal on their auto loans — which these days are often six- to seven-year loans — result in “significantly less equity to use as a down payment on the next vehicle,” he said.

Ally’s average auto loan returned 7.29% in Q3 2022, compared to 6.62% in Q3 2021.

Another great auto lender is Capital One (COF) which publishes its earnings on October 27.

Other banks added to provisions

Some banks fare better because their consumer loan approval standards are much stricter.

Bank of America (BAC) has maintained its more conservative lending standards as its appetite is smaller than other Wall Street banks like Goldman Sachs or JPMorgan Chase.

Bank of America reported its percentage of non-performing loans – loans that do not earn interest – at just 0.39%.

Consumers returned to their old payment habits and used credit cards more often to make purchases. Bank of America said its loan balances rose 12% year over year thanks to more business loans and consumers using their credit cards more.

Even though the bank is more disciplined following the Great Recession of 2007 to 2009, the bank added $900 million to its provision for credit losses.

“Our U.S. consumer customers remained resilient with solid, albeit slower-growing, spending levels and still maintained high deposit amounts,” said Brian Moynihan, chief executive of Bank of America.

Goldman Sachs’ Marcus line of consumer businesses, launched in 2016, did not contribute significantly to its results.

The consumer business, intended to attract Main Street, and its wealth management operations will merge with its asset management division as part of Goldman’s plan to downsize to three units.

Goldman Sachs has attracted about 13 million clients with Marcus and racked up more than $100 billion in deposits, but its losses are expected to total at least $1.2 billion. Goldman Sachs expects Marcus to be profitable from 2022.

Citigroup (VS) reported third-quarter profits fell 25% as it increased its provisions for credit losses while investment banking profits weakened.

Lower earnings were partly due to higher loan loss reserves. Citigroup increased its provision for credit losses by a net $370 million in the quarter, compared with a release of more than $1 billion in the year-ago period. The total provision for credit losses for the quarter was $1.37 billion.

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