According to the third quarter’s delinquency data released by the American Bankers Association (ABA) earlier this week,  card delinquencies fell to 2.75% in Q3 2012, the lowest level since 1994. The report also captures an improvement in delinquency figures for other consumer loans for the quarter, including personal loans and non-card revolving loans. The trend clearly shows a conscious decision by people to cut down on discretionary spending and to clean up their credit record in view of the sluggish economic environment. But while reducing delinquency levels mean lower charge-offs that are good for banks, they also mean lower interest incomes for banks from open-ended loans. This will likely reflect through a decline in revenue figures for the country’s biggest card lenders like JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Capital One (NYSE:COF) and Bank of America-Merrill Lynch (NYSE:BAC), over subsequent quarters.
For The Full Spectrum Of Loans, The Figures Are Mixed
As part of its quarterly Consumer Credit Delinquency Bulletin, ABA reports the delinquency figures for eight closed-ended loan categories and three open-ended loan categories. While closed-ended loans are those which have a fixed repayment period (like car loans or home loans), open-ended loans (like card loans) don’t have such a restriction. In either case, a loan is termed delinquent if the customer does not make any payment towards it in 30 days.
|Delinquencies||Q3 2012||Q2 2012|
|Personal Loan (↓)||2.14%||2.15%|
|Direct Auto Loan (↑)||0.95%||0.92%|
|Indirect Auto Loan (↓)||2.08%||2.23%|
|Mobile Home Loan (↑)||3.51%||3.15%|
|RV Loan (↑)||1.27%||1.15%|
|Marine Loan (↑)||1.55%||1.53%|
|Property Improvement Loan (↓)||0.89%||0.90%|
|Home Equity Loan (↑)||4.20%||4.09%|
|Bank Card Loan (↓)||2.75%||2.93%|
|Home Equity Lines of Credit (↑)||1.93%||1.91%|
|Non-card Revolving Loan (↓)||1.28%||1.35%|
The table above summarizes the delinquency figures for Q3 2012, and provides Q2 2012 numbers for comparison, with the arrow next to the type of loan representing a rise or fall in delinquency rates. As we mentioned earlier, loans linked to discretionary spending (cards / personal / property improvement) have shown a decline in delinquencies, hinting at a more cautious approach by customers. It must be noted here that most home loan delinquencies for Q3 2012 are still rising despite an improvement in home prices for the period, as the delinquency numbers will take a few quarters to catch up.
But When It Comes To Cards, The Impact Will Be Quite Noticeable
The country’s biggest card lenders have been jostling with the issue of card loan defaults since the economic downturn of 2008, something evident from the chart above which shows Citi’s credit card provisions as a percentage of outstanding card loans. As loan provisions and charge-offs go hand-in-hand, the chart reflects the magnitude of write downs the country’s largest bank and credit card issuer has had to undertake over the years. A lower delinquency rate bodes well on this aspect of the bank’s credit card business as it means that the bank will have to set aside less cash as provisions with customers repaying loans in a timely manner.
But there is a downside too. As customers repay their loans and curtail their spending activities, there will be a noticeable reduction in the growth of credit card loans for the bank. We currently forecast that the size of Citi’s outstanding credit card loans will grow by roughly 3% each year over our forecast period.
You can better understand how the bank’s share prices will be impacted if the growth rate is lower than this by making changes to the chart below.Notes: