The Cost of Bank Consumer Loans is Falling

The Cost of Bank Consumer Loans is Falling

The Cost of Bank Consumer Loans is Falling

$JPM, $C, $WFC, $BAC, $V, $MA. $GS

Readers are asking the Big Q: Why when interest rates tick up are consumer loan cost ticking down?

The Big A: When interest rates tick higher, consumers carrying too much debt start to default, that is the assumption, but Americans keep meeting their obligations, and notably 3 of the largest US banks: JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup announced Friday that their costs for bad loans are falling. The same strong economy pushing the Fed to raise rates is helping households keep current on their growing mound of debt.

JPMorgan’s provision for bad loans was just $500-M less than analysts estimated as a measure of trouble in its consumer portfolio fell to the lowest level in more than a decade. Wells Fargo and Citigroup both cut the amounts they set aside for consumer loan losses by at least 13%.

“Most of the consumer credit written since the great recession has been pretty damn good, and our book is extremely good,” JPMorgan CEO Jamie Dimon told journalists on a conference call. “Of course, one day there’ll be a cycle, one day credit losses will be going up.”

A year ago, many observers thought the tide already was turning as four of the largest consumer lenders boosted provisions. Analysts and investors worried that Mom & Pop would struggle to keep up with bills accruing higher interest, or that they would default on car loans as resale values slumped. But restraint in lending, improvement in the labor market and tax cuts held those scenarios at bay.

It is a combination of people being more disciplined and banks better managing their balance sheets. It is much harder now to get a consumer loan.

The rise in credit quality is perhaps the most direct way banks are benefiting from the latest stages of the economic recovery. Industry wide loan growth has not been as strong as expected in the wake of corporate tax cuts, and higher interest rates have been a mixed bag as a flattening yield curve, e.g. narrowing the difference between short- and long-term interest rates, limited the boost to margins.

Some analysts still see credit costs creeping up next year.

Goldman Sachs Group Inc. (NYSE:GS), which entered the consumer space with online personal loans, recently tapped the brakes on that fast-growing business on concern that delinquencies would rise.

And to be sure, banks said that within retail businesses, they are bracing for more defaults on credit cards.

JPMorgan’s allowance for consumer loan losses, meant to cover write-offs over coming quarters, dropped to $9.1-B, less than 50% what it was 6 years ago. Within that, the bank increased the amount set aside for credit cards to $5.03-B, the highest since Y 2012.

Citigroup’s net credit losses in its branded card business increased 5% to $644-M, or 2.9% of the portfolio. The bank has warned that metric could climb to 3.25% over the medium-term as new customers begin to default. Still, it’s a far cry from Y 2009, when the company wrote off more than 10% of its portfolio.

Shares of Visa (NYSE:V) and Mastercard (NYSE:MA), which both collect fees for handling transactions, were up more than 3% as of 12:40p Friday in New York.

Analysts pointed to spending levels telling client that volume trends from the 3 banks were in-line to better than expected for the card networks.

The Big Q2: Will Americans keep shopping responsibly and paying their bills, as we are going to go into a very good retail Holiday season.

Have a terrific weekend

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