Consumer lenders maintain optimistic outlook for 2022

Some of the country’s top bankers remain optimistic about consumer finances this year, saying their clients continue to spend without too many signs of financial difficulty.

Strong consumer spending is poised to spur the modest increases in card borrowing they’ve seen, executives predict. They also show little concern that the credit cycle is starting to turn, explaining that they only detect small increases in loan delinquencies and believe the deterioration will be gradual rather than abrupt.

“The consumer is in as strong a position as I can remember for decades,” Capital One Chairman and CEO Richard Fairbank told a Credit Suisse conference on Thursday.

Credit card redemption rates are slowing, but consumers are using cards to pay for longer-term expenses and have more money in the bank than expected, said Bank of America CEO Brian Moynihan (left) . Discover CEO Roger Hochschild predicts that any deterioration in credit quality will be “relatively gradual”.

Officials at rival credit card issuer Discover feel “really happy with the credit image,” CEO Roger Hochschild told conference attendees. As he expects credit defaults to normalize from today’s “artificially low levels”, Hochschild said he expects strong economic growth to help make any “relatively gradual” deterioration in credit quality.

“As long as employment remains robust, I think it will be very constructive in terms of normalization,” Hochschild said.

The impeccable credit quality of lenders has benefited from government assistance to consumers and the high levels of savings that many have accumulated during the pandemic. This helped them pay off their credit cards instead of carrying balances, and until recently weighed on the ability of credit card lenders to record loan growth.

This picture began to change last year, with US credit card balances rising in the fourth quarter at the highest rates than at any time in the past two decades, according to data from the Federal Reserve Bank of New York.

Some investors fear that the return to consumer loan growth will be accompanied by a further deterioration in credit quality.

But credit quality “remained healthy” in January even as it begins to return to more normal levels, RBC Capital Markets analyst Jon Arfstrom wrote in a note to clients this week. Among the six largest credit card issuers, delinquencies of 30 days or more stood at 0.85% in January, up slightly from 0.81% in December, but well below levels of 1 .5% in 2019, according to RBC analysis.

The outlook for consumer lenders remains favorable this year “given the combination of likely strong consumer spending and very manageable (albeit normalizing) credit,” Arfstrom wrote.

Bank executives spoke on a relatively turbulent day in financial markets, where investor jitters over tensions in Ukraine and worries about inflation helped the S&P 500 index slip 2, 12% to 4,380.26. Bank stock prices fell slightly more steeply, with the KBW Nasdaq Bank Index falling 3.65% to 137.79.

However, comments from lenders at the conference largely reflected a sense of optimism.

“Every portfolio is booming,” said Jennifer LaClair, chief financial officer of Detroit-based Ally Financial.

Ally, which was spun off from General Motors in 2006, was a main beneficiary of the automotive market boom caused by the pandemic. But it also has a mortgage business, offers personal loans and has started offering credit cards again through its recent acquisition from subprime credit card issuer Fair Square Financial.

Although credit is “normalizing,” LaClair said the company’s delinquency rates are 30% lower than pre-pandemic levels.

“We see these starting to increase and normalize, and we expect them to normalize,” LaClair said. “But we’re on such a low base and we’re still seeing very strong consumer balance sheets.”

At Wells Fargo, executives are constantly looking for “cracks that are starting to emerge,” Chief Financial Officer Michael Santomassimo said. But so far, loans from the bank’s consumer and commercial portfolios continue to “perform very well”, Santomassimo said.

He also expressed optimism about the economic environment, saying customers continue to have high levels of cash, job growth remains strong and “people are spending and living their lives.”

There are also positive signs among Bank of America’s customer base, according to CEO Brian Moynihan.

Customer spending in January was “very strong” and the momentum continues in February, with spending up 16% so far this month, he said. Notably, childcare spending in January returned to pre-pandemic levels, meaning more people are starting to be able to return to work, he said.

At the same time, deposit account balances that were expected to decline after the federal stimulus ended nearly a year ago continued to grow, Moynihan said. The current combined balances of accounts that had $5,000 or less before the pandemic are two to eight times higher than they were two years ago, he said.

These accounts were expected to be “emptied” after payments stopped, Moynihan said. But “they’re actually still going up… they’re up 30%, 40%” from February 2021 to now, he said.

Card redemption rates are starting to slow, but people are using cards to pay for longer-term expenses.

“So everything bodes well,” Moynihan said.

About Jermaine Chase

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