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Credit card performance holds up early in recession

Three months into a nosedive recession, performance at U.S. credit card lenders is holding up relatively well despite intense pressures.

Delinquencies and charge-offs have kept roughly steady, failing to track with an unprecedented spike in unemployment. Interchange income cratered and loan balances sagged as cardholders stopped spending on things like travel and restaurants, but transactions volume has started to recover as consumer sales have rebounded.

Heavy provisions for loan write-offs hammered first-quarter earnings, driving Capital One Financial Corp. and Discover Financial Services to losses. Issuers have projected further large reserve builds for the second quarter, but their shares have recovered about half of losses since plummeting in March as investors appear to have recalibrated their expectations for through-the-cycle credit costs lower.

Much remains uncertain. Card lenders have reported that customers are rolling off payment deferral programs as a massive federal aid package outweighed payroll cuts to drive a jump in personal income in April. But much of the emergency funding has already gone out the door, and beefed up unemployment insurance payments are due to expire at the end of July. Many forecasters anticipate elevated unemployment for the next two years or more.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Nevertheless, some observers believe that credit card stocks could rally further, depending on the speed and strength of the recovery. "Investors like to own the space coming out of a recession," Keefe Bruyette & Woods analyst Sanjay Sakhrani wrote in a June 7 note.

First-quarter data, which includes the start of widespread social isolation practices and business shutdowns in March, shows that delinquent and restructured credit card loans continued to trend higher but remained relatively low at 3.9% of total balances. Delinquencies had generally crept up since 2016 as industrywide loan growth maintained year-over-year rates of increase of more than 4% through the fourth quarter of 2019.

The first-quarter increase in the delinquency rate was also supported by a sharp deceleration in year-over-year balance growth to 1.5%, which lenders have attributed largely to the collapse in spending caused by the pandemic. Lenders have also expressed wariness about taking on new customers during a severe economic contraction, and year-over-year balance growth turned negative during the second quarter.

Dean Athanasia, president of consumer and small business banking at Bank of America Corp., said at a conference that debit and credit card spending volume was still down about 5% year over year in early June. While that is much better than the 25% year-over-year drop in April, "we're a long way from where we were," he observed.

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Despite the tight historical relationship between unemployment and credit card loan performance, delinquencies remained subdued through May, according to monthly data from issuers compiled by KBW. Across the industry, total delinquencies fell 4 basis points from March to 2.24% in April, and another 21 basis points to 2.03% in May.

Delinquencies have been kept down in part because of programs under which lenders have allowed borrowers hurt by the pandemic to skip payments, while not recording the loans as past due. BofA reported that 8% of its consumer and small business credit card balances had been granted payment deferrals as of April 27, but has said that relief requests dropped off sharply through June, and that nearly half of credit card borrowers who asked for help wound up making payments anyway.

American Express Co. and Synchrony Financial have both said that many customers in deferral programs have already returned to making payments. Citigroup Inc. said that only about 5% to 7% of customers in its forbearance program have sought to re-enroll.

At Discover, new enrollments in the lender's "Skip-a-Pay" program totaled $61 million of balances during the first week of June, down from a peak of $673 million during a week spanning late March and early April.

Still, Discover President and CEO Roger Hochschild has advised that persistently high unemployment is likely to be a key factor in driving credit losses. While the headline unemployment rate declined to 13.3% in May after a historic spike to 14.7% in April, the median forecast among Federal Reserve policymakers is 6.5% for the fourth quarter of 2021. That compares with an unemployment rate of 3.5% in the fourth quarter of 2019.

Both Discover and Amex have forecast that second-quarter loss reserve builds will be about as large as in the first quarter.

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