Card loan performance on path to normal amid strong employment

Major credit card lenders are sticking to assurances that overdue debt is undergoing an orderly process of "normalization" as credit metrics move ever closer to pre-pandemic levels.

Across US banks, the credit card delinquency rate increased 5 basis points sequentially to 2.68% in the second quarter, still below 2.85% in the fourth quarter of 2019, according to data from S&P Global Market Intelligence. The rate for net charge-offs (NCOs), or amounts that lenders deem unrecoverable, increased 36 basis points sequentially to 3.54%, compared with 3.91% in the fourth quarter of 2019.

The NCO rate bottomed at 1.70% in the fourth quarter of 2021 after the pandemic restrained spending and government aid helped keep household finances strong. Card issuers viewed the performance as unsustainable and typically underwrote the high-yielding loans with expectations for significantly higher losses.

Now, with employment strong, lenders do not see the climb in delinquency and loss rates as alarming. "Cash is still coming in the door and there's still plenty of jobs available," Dean Athanasia, Bank of America Corp.'s president of regional banking, said at an investor conference Sept. 11, adding that payment rates, or the proportion of balances borrowers pay off each month, are still "4 percentage points above where we were pre-pandemic."

Caveats

Lenders including BofA are candid that a deterioration in employment would naturally drive losses higher.

Things for households are "pretty good" currently, JPMorgan Chase & Co. Chairman and CEO Jamie Dimon said at the same conference. "They have more money than they've had, home prices have gone up for the last 15 years. Asset prices have gone up. Their balance sheet is in great shape. Their incomes have gone up."

Still, Dimon emphasized that a number of risks could bring conditions crashing down, highlighting things like high government deficits and the ongoing reduction in the Federal Reserve's balance sheet as it tightens monetary policy.

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Idiosyncratic factors like the resumption of student loan payments as government pandemic relief comes to an end are also certain to pressure some borrowers, although the government is trying to make the transition easy with an additional grace period and a new income-driven repayment program.

"Our sense is that the resumption of student loan payments could prove far more nuanced than the bearish narrative has suggested," BTIG analyst Isaac Boltansky said in a Sept. 9 note.

"Right now, we don't see sort of a cliff," Truist Financial Corp. Chairman, CEO and President William Rogers Jr. said at the investor conference.

Room for more loan growth

Year-over-year credit card loan growth has been slowing since the third quarter of 2022. However, it remained robust at 13.8% in the second quarter this year, and far higher than loan growth overall at 4.5%.

"The loan growth is definitely slower," BofA CFO Alastair Borthwick said of lending generally. "The growth we're seeing is in card."

Broadly, credit card loans tumbled early during the pandemic, and then rebounded quickly starting in 2021. Overall, seasonally adjusted average credit card loans were 17.5% higher at $985.77 billion in the second quarter than in the fourth quarter of 2019, according to data from the Fed.

That is strong growth, but balances nevertheless have not kept pace with inflation and economic growth. The consumer price index increased 17.6% over the same time, while real GDP was up 6.1%.

After adjustment, average revolving balances, or card debt that borrowers carry from month to month — and the kind that generates interest payments — is still lower at JPMorgan Chase than before the pandemic, Dimon said.