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US card credit performance holds up as stimulus safety net frays

Credit card portfolios once again showed strong credit performance in monthly reports posted in the middle of September, with lenders continuing to say that emergency pandemic measures would push the recognition of actual loan losses into 2021.

The average net charge-off rate for securitized receivables across six large issuers increased 12 basis points from July to 2.21% in August, but was down nine basis points from the year prior. Delinquencies as a percentage of receivables declined month over month at Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corporation, Bank of America Corp., Discover Financial Services and American Express Co., and the average for the group fell for the fourth consecutive month since April.

Card performance has been sustained in part by direct federal aid to households in the form of one-time payments and expanded unemployment benefits. Despite a jobless rate that surged to 14.7% in April and remained high at 8.4% in August, personal income was higher in each month from April through July, the most recent month available, than it was in February before the pandemic hit. A survey by a team of economists in July found that more than half of respondents said they mostly used government payments of up to $1200 per adult to pay down debt.

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Click here for data on credit card master trust yields, net charge-offs and delinquencies in Excel format.

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Some forms of government support remain in place, including an expansion of unemployment insurance to freelancers, the self-employed and independent contractors, and accommodative monetary policy by the Federal Reserve that has lowered monthly consumer interest payments and triggered a wave of mortgage refinancings. But supplemental weekly unemployment insurance payments of $600 ended in July, and money channeled by the Trump administration to extend the payments at a weekly rate of $300 is due to run out soon.

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Analysts anticipate that charge-offs will ultimately climb substantially, as do the large loss reserves set aside by lenders. After the free fall in the economy in March and April, and a strong bounce off the bottom that has still left households and businesses damaged and vulnerable, "It's going to be a grind from here," BofA Chairman, CEO and President Brian Moynihan said during a conference presentation Sept. 15.

While another surge in coronavirus infections could derail the progress, wage income has regained ground as federal assistance has tapered, and the economic outlook does not appear as dire as it did at the end of the second quarter when banks last determined loss allowances. The unemployment rate is already below the projection Fed policymakers made three months ago for the end of the year, and their median forecast for the end of 2021 is now 5.5%, down from 6.5% in June.

Some big card issuers have already wound down pandemic-assistance payment deferral programs, and banks, including JPMorgan, have forecast that they will not build up credit reserves again in the third quarter. JPMorgan also said it might not recognize actual consumer losses "in a material way" until the second half of 2021.

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During a conference presentation Sept. 15, Capital One Chairman, President and CEO Richard Fairbank said, "Every month that the consumer remains healthy, we are burrowing a longer tunnel underneath the mountain of high unemployment, and reducing the cumulative losses through the downturn, rather than just delaying the impacts."

Fairbank added that Capital One is setting its reserve levels "based on the old relationship between economic metrics and credit," in view of "all the uncertainty that remains about how this downturn will ultimately play out."

"Provided there is no further deterioration to the macro situation, we believe reserve releases can occur as early as" the fourth quarter, Keefe Bruyette & Woods analyst Sanjay Sakhrani wrote in a Sept. 15 note. He added that another big round of fiscal support to households could act as a tailwind for consumer lenders, but that the spread of substantial job losses to white-collar workers could be a headwind.

"Delinquencies over the next several months should be more reflective of the current macro backdrop," Sakhrani said.