According to data from the Federal Reserve, US consumer credit grew by 5.5% annualized during Q3 the fastest quarterly pace this year. Credit now tops $1 trillion after a multi-year splurge by consumers on auto debt funded by rock-bottom interest rates and relaxed lending criteria. However, now that interest rates are starting to rise again, investors, analysts, and banks are beginning to vent concerns about the state of the American consumers’ balance sheet and credit card losses are among the largest of those concerns, but maybe there is some room for optimism on that front?
Credit Card Losses Rising
Banks have enjoyed years of declining losses from fewer consumers defaulting on debts, but this trend is now starting to reverse. Synchrony Financial was the first major issuer to issue a profit warning on rising losses earlier this year when it announced first quarter provisions for loan losses surged 21% to $1.3 billion compared with the prior quarter — $300 million more than expected. Management expects the write-off rate for the full year to be around 5% or slightly higher according to Bloomberg.
Citi came next reporting $1.2 billion in losses at its consumer lending business in North America for the third quarter. Most of the losses stemmed from its credit cards division. To add insult to injury, management set aside a further $500 million to cover additional losses. At the same time Citi announced its losses, JP Morgan also told investors that it was increasing provisions for unsecured credit losses.
This post was published at FinancialSense on 11/10/2017.